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Chevron - earnings rise despite lower oil and gas sale

Chevron's first quarter revenues were down 6.6% to $50.8bn.

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Chevron's first quarter revenues were down 6.6% to $50.8bn.

However, underlying earnings were up from $6.5bn to $6.7bn, mainly due to higher margins on refined product sales. This was partially offset by lower oil and gas sales where production fell, reflecting the exit from certain projects.

Average prices fell for oil in the US and overseas. Realised gas prices also fell in the US, but were up slightly overseas.

Free cash flow reduced from $6.1bn to $4.2bn, the fall a fairly even split between higher capital expenditure and lower operating cash flows. Chevron ended the quarter with net debt of $7.4bn up from $5.4bn.

During the quarter, the Board declared a dividend of $1.51 per share. Share buybacks totalled $3.75bn, with a further $4.375bn expected over the second quarter.

The shares were flat 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. 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 and a strong record of replacing these.

Demand for fossil fuels is unlikely to have peaked just yet, meaning that there should still be a market for these products. 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.

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 staying clear of wind and solar, choosing to focus on higher return technologies where it can leverage its expertise. Beyond biofuels, these include hydrogen and carbon capture, which are relatively early-stage projects.

Chevron's investment plans in both renewables, and oil & gas are ambitious, reflected in capital expenditure guidance of between $13 to $15bn for each of the next five years. Consensus forecasts suggest that free cash flow should cover this whilst leaving room for payouts 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 it's 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.

Chevron ESG Statement

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.

ESG data sourced from Sustainalytics.

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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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 28th April 2023