Chevron – Today vs 1986 – An Analysis

Two weeks ago, I wrote a post titled Chevron – A History Through Oil Declines, which highlighted Chevron’s stock price performance during severe oil commodity price declines during the 1980’s, 1990’s and 2000’s.  Given oil’s current nearly year-long plunge in prices, this topic is probably the #1 ongoing talking point surrounding the markets, and has been for quite some time.  The post simply showed the numbers for what they were with no objective opinion.  At the end of that post, I promised a follow-up article giving my analysis of the data, and personal opinion on the situation.  So, without further ado…

 

The 1980’s Oil Glut Very Closely Mirrored Today’s Turmoil

 

I do not feel the situation in the 90’s and 2000’s is applicable to today’s oil price collapse simply because the causes were different than the causes today.  However, the 1986 oil glut was strikingly similar to today’s collapse, and I believe we can apply some forward thinking logic using the past history.

 

A brief recap:

The world price of oil found itself peaking in 1980 at over $35 per barrel (over $100 per barrel in today’s dollars). However, the 1980’s recession saw the price of oil fall rapidly following its peak. In an effort to help prop up world oil prices, OPEC decreased oil production. This action had unintended consequences for OPEC, who found its market share drop considerably. By 1985, OPEC’s market share fell to less than one-third worldwide. Saudi Arabia retaliated by producing oil at maximum capacity, creating a massive oil surplus. As a result, West Texas Intermediate crude oil collapsed to less than $10 per barrel, reaching a low of $9.75/barrel on April 1, 1986.

 

From the previous post:

 

1986-1989 CVX

 

1986-1989 Oil

 

1986 CVX vx OIL vx PE

  • WTI crude closes at its lowest price of $10.42 on March 31, 1986.
  • Chevron closes at its lowest post-oil collapse price of $34.25 on July 15, 1987.
  • Chevron sees its minimum P/E ratio of 7.41 on February 4, 1986.
  • Chevron sees its maximum P/E ratio of 37.50 on March 24, 1987.
  • Chevron’s closing stock price low lagged WTI’s closing low by 471 calendar days.
  • Chevron’s P/E ratio at its lowest close on July 15, 1987 was 30.91.

 

Applying This Data to Today

August 24, 2015, now known as “Black Monday” which saw the markets open with a 1,000+ DOW drop, saw oil fall as low as $37.75.  This is a low not seen since the 2008/2009 financial crisis.  The reasons behind the 1986 Oil Glut were remarkably similar to the reasons behind today’s current oil price collapse.  Using data from 1986, it took Chevron 471 calendar days to hit its closing low after crude oil finally found its floor. When WTI crude found its floor of $10.42 per barrel on March 31, 1986, Chevron’s stock price closed at $36.50. 471 calendar days later, Chevron closed at its lowest price of $34.25 per share, a further decline of 6.16%.

 

On Black Monday, Chevron set an intraday 52-week low of $69.58. That day, oil also found its current 52-week low. Let us make the following assumptions:

 

  • The market is currently in a fresh oil bottom that has exceeded March 2015 lows and is matching 2008/2009 financial crisis levels.
  • The oil low has just been formed, and it will take another 471 calendar days for Chevron to fall another 6.16% from its $69.58 low.
  • This fall would bring the stock down to $65.29 by December 7, 2016.

 

Given past history, if we have in fact see the oil bottom, this is where I foresee Chevron settling at its absolute low. If oil continues to slide and set new lows in the $30’s or beyond moving forward, this could exacerbate the issue and could push Chevron’s price floor even lower into the low $60’s.

 

Conclusion

Oil markets are cyclical, with booms and busts happening every decade or so. We are currently in the middle of a bust. Chevron’s stock is in free-fall mode as the price of oil continues to drop and earnings are severely impaired as a result.

 

The volatility of the market is extreme, and the concept of “bottom fishing” can and often does lead to disaster.  Still, I see Chevron as a strong buy priced at these levels for the investor willing to stare at paper losses for awhile, be persistent and dollar cost average a position throughout this time of depressed prices while reinvesting dividends.  I certainly cannot guarantee that Chevron and other oil majors have found their bottoms, but I can say these stocks are beginning to be priced very aggressively for long term buy-and-hold investors.  I will continue to buy Chevron and the oil majors through this crisis as a very long term, generational investment.

All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.

Anthony

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