Chevron's second quarter revenue fell 29% to $48.9m. A 2% increase in production failed to offset the sharp falls seen in oil and gas prices.
Underlying earnings nearly halved to $5.8bn with high double digit declines across of the Group's businesses.
Free cash flow fell from $10.6m to $2.5bn and net debt doubled to $11.9bn.
On a quarterly basis, Chevron paid out more than ever before to shareholders, with dividend payments reaching $2.8bn and share buybacks totalling $4.4bn. A dividend of $1.51 has been declared for the quarter.
The shares were down 1% 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. 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.
More recent acquisition activity has shifted towards bolstering traditional oil & gas production. This year's $6.3bn of US producer PDC makes strong financial sense to us and looks likely to add about $1bn to free cash flows next year. The dip in commodity prices could present more opportunities for consolidation. We're supportive but not if it's at the expense of investment in the energy transition.
Chevron's investment plans in both renewables, and oil & gas are ambitious, reflected in annual capital expenditure guidance of between $14-$16bn out to 2027. Market forecasts suggest that free cash flow 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 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.
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.
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.
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