Chevron Corporation (CVX) Common Stock USD0.75
HL comment (2 February 2024)
Chevron's fourth-quarter revenue fell 16.5% to $47.2bn. This comes as a 12.6% increase in production to record levels was more than offset by sharp declines in oil and gas prices.
Underlying earnings fell from $7.9bn to $6.5bn, largely driven by the fall in revenue.
Free cash flow dropped from $8.7bn to $8.1bn. Net debt was $12.6bn, up from $5.4bn at the start of the year.
Through dividends and share buybacks, Chevron returned a record $26.3bn of cash to shareholders in 2023.
A quarterly dividend of $1.63 per share has been announced, up 8%.
The shares rose 1.8% in pre-market trading.
Chevron's revenue and profits continue to fall as oil prices have come down sharply from recent heights. To help offset the worst of this impact and keep cash flows at healthy levels, production's been ramped up to record levels.
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 too, and spent heavily to expand those levels.
That brings us onto a bigger transaction. Chevron recently announced the acquisition of Hess Corporation, a global energy company with assets across Guyana, North Dakota, Mexico and Thailand. The deal's expected to close in the first half and will be settled by issuing new shares, which helps keep Chevron's cash balances plump and helps underpin the growing dividend. As always, 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 the $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.
Chevron key facts
Forward price/earnings ratio (next 12 months): 11.5
Ten year average forward price/earnings ratio: 21.1
Prospective dividend yield (next 12 months): 4.4%
Ten year average prospective dividend yield: 4.3%
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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