Chevron Is Still In A Lot Of Trouble

Summary

• CVX has issued tens of billions of dollars in new debt in recent years.
• However, it hasn’t funded anything that can support growth; it funded keeping the lights on.
• CVX’ balance sheet is getting worse by the year and this is yet another reason to sell the stock.

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I’ve been pretty critical of Chevron (NYSE:CVX) recently because the company’s fundamentals, to put it bluntly, are inferior to that of XOM and just about any other mega-cap I can think of. Chevron has struggled enormously in the past couple of years with not only earnings but free cash flow as well and despite huge reductions in capex, it is still in a bad spot. That has led it to issue tremendous amounts of new debt and in this article, I’ll take a look at not only how much Chevron has begun to use debt but also the implications of such usage going forward.

I’ll be using data from company filings for this exercise.

Let’s first begin by taking a look at what CVX has done with both short and long term debt over the past five years, which encompasses some “normal” years for CVX as well as the turmoil of 2015 and 2016.

One thing CVX has done a lot of in the past few years – good times or not – is increase its usage of debt. LT debt was $12B in 2012 and has risen to better than $35B at the end of 2016. Short term debt was basically nothing in 2012 but usage of that has increased exponentially and sat at almost $11B at the end of last year. In total, between ST and LT debt, CVX went from just over $12B in 2012 to more than $46B by the end of last year. That’s enormous growth in obligations for any company and in particular, for one that has struggled as mightily as CVX in terms of operating profit and FCF.

Unsurprisingly, we can see interest costs have risen right alongside outstanding debt. Thankfully, ST debt is generally cheaper to service than LT debt so interest costs haven’t risen quite as quickly as total debt. However, ST debt, obviously, has to be repaid much more quickly and given CVX’ current FCF situation, that almost certainly means more borrowing is on the horizon to replace it. Short term rates have largely moved up in response to the tightening cycle we are experiencing in the US and that means that ST debt will become more expensive to finance over the next couple of years, all else equal. It should still be cheap enough that CVX can continue to use it but even higher expenses is one thing CVX could certainly do without right now.

Debt can be a very useful tool for any company and when used properly – to fund R&D, acquisitions, buybacks, etc. – it can juice growth. But CVX has been using its debt to simply survive at a time when its FCF is woefully inadequate. In other words, CVX has issued all of this debt just to keep the lights on, not to fund growth. And given how its capex has fallen off a cliff, it isn’t really even keeping the lights on in the sense that it otherwise would. It has been issuing debt to fund its bare bones capex scheme which has staved off a full-blown crisis, but has left the business in a situation where it isn't investing in growth the way it would under normal circumstances. This has exacerbated its poor earnings and as a result, this is a very bad situation in a few ways.

I’m not trying to paint the picture that CVX cannot afford its current level of debt; it is still under a billion dollars in financing costs annually. That’s totally fine and CVX can afford that for a very long time to come. The problem is this; what if it needs debt for something else? What if CVX needs to pick up all the capex it hasn’t bothered with in the past couple of years because it has been unable to afford it? That money has to come from somewhere and it certainly isn’t coming from FCF anytime soon; CVX is a very long way away from getting back to some semblance of normal. Besides, even when it does, its cash needs just to pay off its debt will be huge. That, or it will simply refinance, which just restarts the clock on the debt mess.

Let's not forget that CVX is also still trading for almost 26 times this year's earnings so it isn't like the stock is cheap, either. The oil names - Chevron included - have recovered from the trough in earnings but this is nothing like what is needed to justify a $103 stock price. Chevron's bloated valuation combined with a desperate FCF situation is really quite something to behold, and not in a good way.

The sheer level of debt that CVX has employed in the past couple of years means that it no longer has the flexibility to borrow to buy back stock or fund R&D and the like. The lack of a buyback exacerbates the valuation as well as it is no longer seeing the EPS tailwind of a smaller float. CVX is in a position where it is simply trying to keep the business running amid a sizable shock to its ability to finance itself via FCF. This, perhaps more than anything, illustrates the severity of its problems. Its FCF has been pummeled and that isn’t recovering anytime soon and even when it does, it has a very long way to go to return to the levels we saw just a couple of years ago. Seeing a company that isn’t buying back stock or even keeping up with close to what would be considered normal capex issue this much debt tells you all you need to know; CVX is still in a lot of trouble.

Analyst’s 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.