Chevron's Summer Plunge Appears to Be Over

Posted Aug 4th 2010 3:30PM by Joseph Lazzaro
Filed under: Chevron Corp (CVX), Stocks to Buy

The wild, unpredictable ride called Chevron Corp's (CVX) shares, first discussed here on February 15, 2009 at a price of $66.18, continues.

However, it's not that the aforementioned stock pattern is preferred by investors. In April it appeared that Chevron had finally broke out of a roughly 2-year, $60-75 trading range, when it cleared resistance at $80, as economic data in early 2010 confirmed that the U.S. economic recovery was underway. Chevron then tested $84, only to plunge to about $66 this summer, some of it an overreaction to the U.S. government's offshore drilling moratorium.

However, after cooler heads took over -- only about 6% of Chevron's production is Gulf of Mexico-based -- the stock resumed its move north, pushing back above the key, 50-day moving average to about $78.

Further, assuming no more irregular events (such as oil spills) in the oil sector, look for Chevron's production to increase from its current 2.75 million barrels per day (bpd) by about 2-2.5% per year through 2012. Meanwhile, its reserve replacement rate remains adequate.

Moreover, the U.S. economic recovery is critical to improving downstream margins for refiners, particularly for gasoline. This summer, margins have improved and should continue to do so, assuming at least moderate job growth and absent a double-dip recession.

The First Call FY2010/FY2011 EPS estimates for CVX are $9.13 to $9.79.

2010 Outlook: I view Chevron as a long-term play, but if investors are looking to sell CVX within the year, it's probably best to take your profits after it rises to $87-89, if it fails to rise above $90.

Stock Analysis: I consider Chevron Corp to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 25% position in CVX now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 50% of my CVX position before October 2010 and I'd put a sell/stop loss at: $47.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

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