Chevron - Time To Take It Seriously; A Few Problems Remain

| About: Chevron Corporation (CVX)

Summary

Chevron is a solid oil & gas company that should be part of any balanced portfolio.

The company is not generating enough free cash flows to pay for the dividend. As a result, its long-term debt is getting bigger.

Chevron is showing an ascending channel pattern. While it is a long-term investment, it is time to take some profits off the table.

Investment Thesis


After three years into a dramatic decline in oil & gas prices, big oil companies - E&P oil companies as well - have successfully demonstrated that they know how to tune their business model to the right frequency to generate positive cash flow, shrink debt levels and keep paying a sizeable dividend.

It was not an easy task, of course. Despite some improvement from January 2016, when the price of oil plummeted to a record low of $27.50 a barrel, oil remains stubbornly depressed, more than 50% lower than it was in June 23, 2014, when the decline really started. That particular day, Brent oil price closed above $115 a barrel and started its unrelenting plunge into oblivion.

Oil prices are seen as more stable since June 2016 as a consequence of several OPEC and non-OPEC agreements to rebalance the ailing market.

While many investors continue to have lingering doubts that OPEC will successfully implement these agreements to the fullest, even a partial compliance can do the magic trick, and it seems to work, according to the chart above. That said, after three years of cuts in exploration expenditure, the market has gotten much closer to stabilizing on its own anyway.

The recent quarterly results show a three-year-long ongoing campaign across the entire oil industry to cut costs and capital spending to allow operating profitably in a $45-55 a barrel price environment.

Chart Brent Crude Oil Spot Price data by YCharts

These factors have led many strategists to suggest that a bottom in oil stocks has been achieved and that now may be the right time to start "looking" again in the oil & gas industry, which is divided into three major sectors:

  • E&P - includes searching for potential underground or underwater crude oil and NG fields, etc.
  • Midstream
  • Downstream

Two simple cases of this general study:

  1. Integrated oil & gas companies.

  2. Independent oil & gas companies.

In the “Integrated oil & gas companies,” I will study seven different names:

  • Exxon Mobil (NYSE:XOM)

  • Chevron Corporation (NYSE:CVX)

  • Royal Dutch Shell (RDS.A, RDS.B)

  • Total SA (NYSE:TOT)

  • BP Plc. (NYSE:BP)

  • ENI (NYSE:E)

  • Statoil (NYSE:STO)

Case 2: Chevron Corp. - Stock Analysis

CVX is showing an ascending channel pattern.

“It is also known as Bullish Channel pattern as the price is moving up. It consists of two trendline parallel to each other having point forming higher highs and higher lows hence resulting in bullish channel or upside channel.”

This pattern suggests that CVX is about to retrace significantly to the lower support around $107-$110, unless a new news can boost the stock sufficiently to breach the upper trend line, which is unlikely as we speak, but of course possible.

Financial table

Chevron Corp.

1Q'15

2Q'15

3Q'15

4Q'15

1Q'16

2Q'16

3Q'16

4Q'16

1Q'17

2Q'17

Total Revenues in $ Billion

34,56

40,36

34,32

29,25

23,55

29,28

30,14

31,50

33,42

34,48

Net Income in $ Billion

2,57

0,57

2,04

-0,59

-0,73

-1,47

1,28

0,42

2,68

1,45

EBITDA $ Billion

7,32

6,32

7,05

3,19

2,69

4,73

5,30

4,77

7,37

7,31

Profit margin %

7,4%

1,4%

5,9%

0

0

0

4,3%

1,3%

8,0%

4,2%

EPS diluted in $/share

1,37

0,30

1,09

-0,31

-0,39

-0,78

0,68

0,22

1,41

0,77

Cash from operations in $ Billion

2,32

7,22

5,36

4,56

1,14

2,53

5,31

3,86

3,88

5,04

Capital Expenditure in $ Billion

7,60

7,64

6,81

7,45

5,57

4,47

4,07

4,01

3,32

3,22

Free Cash Flow (YCharts) in $ Billion

-5,28

-0,42

-1,45

-2,89

-4,43

-1,94

1,25

-0,15

0,56

1,81

Cash and short-term investments $ Billion

12,68

12,16

12,93

11,02

8,56

8,76

7,35

6,99

6,98

4,76

Long-term Debt in $ Billion

33,87

31,83

35,79

38,47

42,26

45,02

45,52

46,03

45,16

42,77

Dividend per share in $

1,07

1,07

1,07

1,07

1,07

1,07

1,07

1,08

1,08

1,08

Shares outstanding (diluted) in Billion

1,88

1,88

1,87

1,87

1,87

1,87

1,88

1,88

1,90

1,89

Oil Production K boep/d

1Q'15

2Q'15

3Q'15

4Q'15

1Q'16

2Q'16

3Q'16

4Q'16

1Q'17

2Q'17

Oil Equivalent Production in K boep/d

2681

2596

2539

2673

2666

2528

2513

2669

2676

2780

Total price liquid US ($/b)

43,11

50,29

41,98

35,42

26,49

35,79

36,88

40,84

44,83

41,42

Total price natural gas US ($/mmtu)

2,27

1,92

1,96

1,53

1,32

1,21

1,89

2,16

2,39

2,32


Trends: Revenues, Free cash flow and Upstream production



Analysis


On July 28, 2017, Chevron released its second-quarter earnings results.

Highlights?

  • Total revenues were $34.48 billion, up 15.1% year over year.

  • Upstream production grew a whopping 9.96% year over year to 2780 K boep/d. Almost all gains came from bringing major capital projects on-line, including Gorgon, Angola LNG, Jack/St. Malo, and Alder. Those gains were partially offset by a lower contribution from the company's production-sharing contracts in places like the Saudi Arabia/Kuwait Partitioned Zone.

  • Management stated that several assets are for sale. Chevron intends to sell another $5 billion in assets before the end of the year.

  • The Permian Basin continues to perform very well. Chevron ended the quarter with production around 175 K bop/d, which is well above expectations.

  • The company now estimates its 2017 Permian wells' internal rate of return is greater than 30% with oil at $50 a barrel, based on lower drilling and lease operating costs.

  • Chevron has now generated $8.92 billion in cash, well above the $6.54 billion in capital spending, for the six months 2017.

  • Management wants to have cash from operations cover expenditures and dividend for the entire year. It is unlikely even if the company can deliver 2Q’17 results on a regular basis. Dividend on a yearly basis represents over $8 billion, which means Chevron will have to produce over $5.6 billion in free cash flow during H2 2017.

CFO Patricia E. Yarrington said on the conference call:

Looking ahead to the second half of the year, we expect our cash outcomes to favorably reflect growing production and additional proceeds from asset sales. Despite some anticipated unevenness between the third quarter and fourth quarter, for example related to the precise timing of sales transactions, pension contributions and affiliate dividends, we do fully expect to end the year in a cash balance position at current prices.

Most recent news: Chevron sells its 75% stake in Chevron's South Africa unit and all of Chevron Botswana for a combined $973 million to Glencore (OTCPK:GLCNF).

It was the second attempt by the company to sell these downstream assets after China's Sinopec (NYSE:SHI) announcement in March for the same price finally fell through.

Glencore, which was one of several other bidders in that auction, said the purchase offered "an attractive downstream opportunity for its oil business."

The deal, which will include Glencore retaining Chevron's local management team and workforce, will be funded using existing cash resources and is expected to close in mid-2018.

"Glencore intends to manage its overall oil asset portfolio to ensure that, including this transaction, net additional capital investment is limited to less than $500 million over the next 12 months," it said.

Chevron, which has had a presence in South Africa for more than a century, announced the sale of the assets in January 2016 due to weak oil prices.

Conclusion

Chevron is a solid oil & gas company that should be part of any balanced portfolio. The business model is very similar to my first case study: Exxon Mobil.

However, the company is not generating enough free cash flow to support the dividend paid, which is $4.32 per shares per year (3.8% annually), or a payout of $8.2 billion per year.

This situation is forcing it to continue winding down spending, while others are increasing capital expenditure again. Capital expenditure for 2Q'17 ($3.2 billion) represents only 42% of what was spent in 1Q'15.

Chevron managed to have $3.47 billion in free cash flow the past four quarters (YCharts) only, and despite an effort to reduce long-term debt, it is still up 26% since 1Q'15.

Gamechanger in Place: Australia LNG

With Gorgon on-line and Wheatstone (Australia), which is its giant liquefied gas project, scheduled to start up soon, there is a lot more room in the company's capital spending budget. The project had a price tag of $88 billion (Chevron's cost is estimated at $47 billion).

Both Gorgon and Wheatstone (just 60 miles apart) are about to generate revenues for many years to come. These two productions will be added to three additional major productions at Chuandongbei, Lianzi, and Moho Nord, which came on-line last quarter.

Another positive for Chevron is its strong presence in the USA, and the company expects hundreds of thousands more barrels per day from this segment alone (2Q'17: 2,780 boep/d), while Exxon Mobil, for example, manages a flat production at best (2Q'17: 3,922 K boep/d).

Recommendation

Fact: Oil prices are really contained between two strong opposite catalysts (shale and OPEC) and will have a hard time breaking away from the $45-60 per barrel range. Never forget: Oil & gas prices are the backbone of this industry, so invest accordingly.

One strategy that I would recommend is to take some profit off the table at $117-117.50 and hold until the stock retraces back to around $107-$110. The one potential upside is a possible stock split down the road.

However, CVX should be considered as a long-term investment, and the trading part should not involve more than 25% of the total shares owned.

Important note: Do not forget to follow me on the oil sector. Thank you for your support, it is appreciated.

Disclosure: I am/we are long CVX.

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.

Additional disclosure: My family fund owns a small position.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Major Integrated Oil & Gas
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here