Chevron: The Dividend Struggle Remains

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About: Chevron Corporation (CVX)
by: Stone Fox Capital
Summary

Chevron provided the official 2017 capital spending budget.

The spending levels signal the end of sequential capex cuts, yet the dividend isn't covered.

Risks remain in the path to dividend coverage while the stock drives towards multi-year highs.

Chevron (NYSE:CVX) announced the 2017 capital spending budget that continues a trend of annual reductions. The sequential spending levels though suggest a shift in the direction going forward.

Amazingly, the stock trades at $115 and near the multi-year highs. The oil exploration firm hasn't even gotten to a point of covering the dividend so is now really a good time to own the stock?

Chevron forecasts spending $19.8 billion in capex next year. The cash outlays shrink to $15.1 billion when excluding the $4.8 billion share of affiliate expenditures that don't come out of cash.

The capital spending amounts aren't a huge shock as the company forecasted spending levels between $17 and $22 billion for 2017 all the way back in March. With oil prices remaining mostly below $50/bbl, the risk appeared to the downside. In fact, the average analyst estimate was for capex spending of $18 billion so the forecast is actually above estimates.

For Q3, Chevron spent $4.1 billion on cash outlays for capex. The forecast for all of 2017 is $3.78 billion per quarter. In essence, all of the cuts have already occurred as the year ends.

Investors need to keep in mind that Chevron is still forecasting improving cash flows needed to cover the dividend at $52/bbl oil. The amount though requires asset sales in order to cover the cash outlays.

Source: Chevron presentation

Possibly more troubling is that only around 10% of spending is going towards the Permian shale where the competition is ramping up. Too many competitors are ramping up drilling rigs at this level of oil prices while Chevron is closing in on reaching cash flow breakeven.

In essence, investors have run the stock up based on the dividend yield that the company is still struggling to cover. Now the yield is down to only 3.7% after these gains. This doesn't even factor into the equation that oil service companies want to recover some of the price concessions taken during the slump in drilling making the breakeven target one that might actually shift upwards.

The key investor takeaway is that the story is difficult to turn positive on when Chevron is on the wrong side of the cash flow ledger while the stock pushes towards the highs.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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