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Chevron - acquires Hess for $53bn, Q3 profits fall

Chevron's third-quarter revenue fell 18.9% to $54.1bn.

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Chevron's third-quarter revenue fell 18.9% to $54.1bn. A 3.9% increase in production was more than offset by sharp declines in oil and gas prices.

Underlying earnings fell from $10.8bn to $5.7bn, as all of the group's businesses saw declines.

Free cash flow fell from $12.5bn to $5.0bn. Net debt was $20.6bn, down from $23.3bn at the start of the year.

On 23 October, Chevron announced its acquisition of Hess Corporation, a global independent energy company, for $53bn in an all-stock transaction.

A quarterly dividend of $1.51 per share has been declared.

The shares were down 2.3% in pre-market trading.

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Our view

Chevron's business is dominated by the extraction and sale of fossil fuels. While that remains the case, its fortunes will mainly rest upon commodity prices (over which it has no control), production levels, and the cost of pumping out oil and gas. Ultimately, that's the driving force behind the decline in profits this quarter, which also fell short of market expectations.

In a world that's trying to wean itself off carbon-producing energy sources, Chevron's targeting average annual growth of at least 3% out to 2027. It's got plenty of reserves in the ground too, and spent heavily in the quarter to expand those levels.

That brings us onto a bigger transaction. Since the quarter-end, Chevron announced the acquisition of Hess Corporation, a global energy company with assets across Guyana, North Dakota, Mexico and Thailand. The deal's going to be settled by issuing new shares which helps keep Chevron's cash balances plump, and adds weight behind new guidance that dividends and share buybacks will increase in the new year. Nothing is guaranteed.

Through a combination of scale and efficiency, Chevron's expecting to see a strong uplift in profitability from each barrel sold compared to pre-pandemic levels. That's assuming oil at $60 per barrel, which is well below current prices. But as results have shown so far this year, downward swings in commodity prices will still really hurt the bottom line.

Around half of Chevron's production profile comes from natural gas and it's improving its ability to connect its resources to different markets internationally. We see this as a positive as Europe seeks to reduce its reliance on Russian energy supplies.

This is all well and good, but in the long term, energy companies can't afford to ignore the drive towards renewable sources of energy. Following last year's $3.15bn acquisition of Renewable Energy Group, Chevron is one the largest producers of biofuels in the US. But the contribution to profits is likely to stay relatively small for now.

Chevron's investment plans in both renewables, and oil & gas are ambitious. Once the Hess deal closes, the annual capital expenditure budget's set to increase to between $19-$22bn. Market forecasts suggest that operating cash flows should cover this whilst leaving room for pay-outs to shareholders. As ever there are no guarantees. Both profitability and cash flows are somewhat hostage to the oil price where we see near-term headwinds.

Chevron's valuation is below its long-term average which we think reflects a shift in investor sentiment towards the sector and its long-term future. Meanwhile, it's trading at a significant premium to European peers, which we see as unjustified, particularly whilst its strategy beyond peak-oil remains unclear.

Environmental, social and governance (ESG) risk

Environmental concerns are the primary driver of ESG risk for oil and gas producers, with carbon emissions and waste disposal being the main issues. Health and safety, community relations and ethical governance are also contributors to ESG risk.

According to Sustainalytics, Chevron's overall management of material ESG issues is strong, although we have some concerns. It is assessing the commercial viability of clean energy sources and strategies, with the goal of adapting its business activities to align with a low-carbon economy. The company showcases initiatives to tackle carbon-related risks, such as its plan to spend USD 8 billion through 2028 on activities such as renewable fuels, hydrogen, carbon capture and offsets. However, the company does not appear to have absolute carbon reduction plans and remains involved in controversies related to environmental pollution.

Chevron key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 27th October 2023