Dow component Chevron Corporation (CVX) rose nearly 23% in Tuesday's session after announcing that there were no plans to cut the whopping 9.52% dividend, despite a historic crash in the crude oil market. The stock had dropped 55% in two and a half months to its lowest low since 2005 before the news, caught in a sector bear market that is likely to trigger dozens of bankruptcies at less liquid rivals.
West Texas Intermediate (WTI) crude oil futures are trading at an 18-year low as a result of the pandemic and the price war between Saudi Arabia and Russia, making a huge chunk of U.S. production unprofitable. Big conglomerates have the resources to survive the storm, but upstream players are at major risk, forced to watch income streams and profits drop precipitously. Even so, it isn't too early to bottom fish because any deal to end the price war should lift the futures contract back into the $30s.
Chevron isn't a bad choice in this regard. It boasts a market cap of $125.1 billion and is engaged in an aggressive cost-cutting plan, seeking to reduce capital spending by $4 billion, or 20% of the current budget. Not surprisingly, the biggest cuts will come from upstream business, mostly in the Permian Basin. Chevron has also suspended share buybacks, letting cash flow back into the bottom line rather than stacks of paper that have taken on far less value in recent years.
The most recent bounce started at the .786 Fibonacci retracement level of the 2003 into 2014 uptrend, which marks a high-odds reversal zone. The decline undercut the 2008 low by four points before bouncing back above that level, reestablishing support. A one- to three-month basing pattern in the upper $50s and low $60s may be all that's required to generate a multi-month recovery that targets 200-month exponential moving average (EMA) resistance in the low $90s.
Canada's Enbridge Inc. (ENB) focuses its business on liquid pipelines and gas transmission, as well as alternative energy and supportive services. The stock is currently trading near a 10-year low after a 48% six-week decline. Even so, Enbridge has carved one of the strongest technical patterns among energy blue chips, holding a relative high in the 20-year trading range. It currently pays an 8.93% forward dividend yield.
A recovery wave that started in the fourth quarter of 2008 reached an all-time high at $57.19 in 2014, giving way to a two-legged downtrend that landed on the .786 retracement level last week. It has lifted a few points off that trading floor into this week but is still exhibiting few signs of a sustained reversal. The stock is not oversold, so a bottom may take time to form, but the reversal at a key harmonic level could signal an eventual turnaround.
Valero Energy Corporation (VLO) sells gasoline and other transportation fuels and petrochemicals in the United States, Canada, and overseas. It currently owns and operates 15 petroleum refineries that produce retail fuels under multiple names that include Diamond Shamrock, Valero, and Texaco. The stock is currently trading at a six-year low after a 63% six-week decline and currently pays an 11.31% forward dividend yield.
A 2017 breakout above the 2007 high posted an all-time high above $125 in June 2018 and eased into a trading range between that resistance level and support in the upper $60s. It broke down in February 2020, entering a vertical slide that pierced the .786 retracement level of the 2008 into 2018 uptrend on March 18. A basing pattern at or near this price zone could yield a multi-month bottom, ahead of a bounce that targets new resistance at the breakdown level.
The Bottom Line
While it's too early to buy most energy stocks, these three sector giants have reached deep support levels that could yield substantial upside in coming months.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.