This report was generated using published research from our Energy team led by Sector Head Fernando Valle. If you want to access more Energy research, CLICK HERE.
Chevron Corporation (CVX), a leader in the global energy landscape, has demonstrated resilience and strategic foresight amid the fluctuating dynamics of the energy sector. Kicking off our Energy sector launch, we are bullish on CVX, buoyed by a strong balance sheet, a top-class position in the US Permian shale basin, strategic acquisitions, and a steadfast commitment to growth in both traditional energy businesses.
FINANCIAL PERFORMANCE AND PORTFOLIO
Chevron Closed the Gap: Chevron’s had the best balance sheet in Big Oil for well over a decade, preventing drawdowns in the toughest parts of the oil price cycle. Leverage sits below 0.2x 2024 EBITDA and the company in generating significant free cash flow at oil prices above $80-a-barrel. It generated nearly $23 billion in free cash flow (pre-working capital) in 2023, more than enough to cover its $11.3 billion in dividends, though it overspent with $14.7 billion of share buybacks.
Strong, Diverse Legacy Portfolio: Chevron’s oil & gas portfolio has strong cash flow generating assets, like Gorgon and Wheatstone LNG in Western Australia and the Tengizchevroil field in Kazakhstan. Tengiz is in the latter stages of a costly expansion, but with sunk costs now mostly behind the company it should improve cash generation from year-end 2024. Its Permian acreage is one of the top performers in the basin, partially because Chevron uniquely owns most of the mineral/royalty rights, lowering its cost, but also due to its breadth and size.
SUSTAINABLE GROWTH AND FUTURE OUTLOOK
Strategic Acquisitions Paying Off: Chevron's strategic acquisitions have fortified its asset base and future growth trajectory. The acquisition of PDC Energy has strengthened Chevron's position in crucial U.S. production basins, with the DJ Basin now among its top-five producing assets. Its earlier acquisition of Noble Energy has been a strong performer, which gave Chevron an entry into the DJ basin and mediterranean natural gas. Prices for its natural gas portfolio have risen significantly over the past two years, culminating in improved returns on capital.
Balancing Traditional and New Energy Investments: Chevron's approach to growth still favors expanding its traditional oil and gas operations, even while also venturing into new energy domains such as renewable fuels, hydrogen, carbon capture, and other emerging technologies. This strategy not only ensures sustained profitability but also aligns with global energy transition trends. Chevron's significant investments in renewable energy projects, including a solar power project in New Mexico and the acquisition of ACES Delta and Renewable Energy Group show its willingness to navigate both short-term and secular trends in the energy transition.
Acquisition of Hess Corporation: The definitive agreement to acquire Hess Corporation stands as a strategic milestone, poised to enhance Chevron’s long-term performance by adding proven assets and expertise. This acquisition, expected to consolidate Chevron's leadership in the energy sector, underscores the company's strategic foresight and operational agility. There is still risk in this deal, as Hess’ partners in Guyana, ExxonMobil and CNOOC, have filed a claim for the right to match Chevron’s bid and acquire Hess’ stake in the project, the main reason behind this deal.
COMPETITIVE EDGE AND INDUSTRY POSITION
Leading in Free Cash Flow Generation: In the period from 2020 to 2023, Chevron, along with other oil majors, has generated 40% more free cash flow than in the previous decade. This impressive financial discipline, coupled with strategic investments and acquisitions, has positioned Chevron as a second-to-none player in the energy sector. Chevron's ability to generate substantial free cash flow, even in fluctuating market conditions, underscores its financial health and operational excellence.
OPERATIONAL EXCELLENCE AND PRODUCTION GROWTH
Chevron's worldwide net oil-equivalent production increased by 4% from the year-ago quarter, primarily due to strategic acquisitions like that of PDC Energy, Inc and continued growth in the Permian basin. This growth in production, amidst a backdrop of industry-wide challenges, highlights Chevron's operational efficiency and strategic planning prowess.
RISK CONSIDERATIONS
While Chevron's outlook is predominantly positive, potential investors should consider risks including volatile oil prices, regulatory changes, and the pace of the global energy transition. The company’s acquisition of Hess has also been challenged by competitors like Exxon, as the company filed for arbitration. However, the company is confident that the deal will close. Chevron's strategic investments in renewable energy and carbon reduction technologies help to mitigate these risks by positioning the company as a leader in the energy transition.
CONCLUSION
Given Chevron's solid financial performance, strategic acquisitions, and commitment to sustainable growth, we are bullish on the stock as a proven Quad 2 performer. Chevron's diversified portfolio, spanning traditional oil and gas to new energy ventures, positions it uniquely to capitalize on the global energy transition. Furthermore, Chevron's disciplined approach to capital allocation and shareholder returns, evidenced by its significant cash returned to shareholders and strategic investments for future growth, makes it an attractive investment for those seeking both stability and growth in the evolving energy landscape.
