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Chevron: Returning More Cash To Shareholders As Dividends Rather Than Buybacks

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About: Chevron Corporation (CVX)
by: Michael Fitzsimmons
Summary

The company delivered $4.3 billion of free cash flow in Q2, an estimated $2.25/share.

After a 6% quarterly dividend increase in Q1, the quarterly dividend is $1.19/share ($4.76/annually), which equates to a 3.9% yield.

The company also bought back $1 billion worth of shares in Q2 and expects to increase buybacks to $1.25 billion in Q3.

Unlike many FCF positive energy companies, Chevron allocates more to dividends directly to shareholders as compared to buybacks. That's refreshing!

Chevron is my favorite international integrated oil major due to its production growth profile, strong shareholder returns, excellent balance sheet, and pivot to shorter-term projects.

Chevron's (CVX) Q2 EPS report was more of what investors have come to expect from what arguably is the best integrated oil major. Overall production was up 9% to an all-time record 3.08 million boe/d while Permian production reached 421,000 boe/d - up 50% yoy. Perhaps more impressive was Chevron's financial performance.

Q2 free-cash-flow ("FCF") generation was $4.3 billion, which equates to an estimated $2.25/share.

Chevron FCF Generation Source: Q2 Presentation

As the graphic above shows, YTD Chevron has generated $7.6 billion of FCF. But it just isn't the absolute number that impresses me, it's how management is allocating a return of capital to shareholders. In Q2, CVX paid $2.3 billion in dividends and spent $1 billion on share buybacks. That is over a 2:1 ratio in dividends directly to shareholders as compared to buybacks, and it is a rarity these days.

Note my previous Seeking Alpha article on ConocoPhillips (COP) titled What Conoco Is (And Is Not) Doing With Its Massive FCF Generation. In that piece I pointed out that COP generated $6.5 billion in FCF over the past 12 months and spent almost 3x on share buybacks as compared to the dividend ($3.8 billion vs. $1.3 billion). Now one could certainly argue that COP's stock was significantly undervalued, but was it any more undervalued as compared to Chevron? And even if it was, is an ~3x over-emphasis on buybacks rational and fair to ordinary investors who had a short time ago had their dividend dramatically slashed by management? I obviously don't think so, and much prefer Chevron's emphasis on dividends directly to shareholders. Leave it up to the shareholder to decide if he/she wants to invest in more shares. And make management work harder to earn its compensation, rather to artificially boost per share metrics by allocating significantly more capital to buybacks as compared to dividends.

Net Income

Source: Q2 EPS Report

As shown above, Q2 net income per share was $2.27 - up 28% as compared to Q2 of last year. The big change was due in part to $740 million in earnings due to the Anadarko Petroleum (APC) termination fee as the company totally outsmarted Occidental Petroleum's (OXY) management and refused to over pay for APC's assets. Note that OXY's shares are down ~20% since it began bidding for APC. Regardless, the $740 million equates to roughly $0.39/share of Q2's net income.

Strategy

The company continues to high-grade its portfolio with its three-year target of $5-10 billion in asset sales. During the quarter, the company announced the sale of its Central North Sea assets for $2 billion and that deal is expected to close later this year. Meanwhile, the company continues to pivot from the large cap-ex and long lead time projects of the past decade (I am primarily referring to GoM offshore and Australia LNG) to more short-cycle spending led, obviously, by the company's excellent acreage in the Permian Basin. The company estimates that 70% of 2019 cap-ex will deliver cash flow within two years. That level of flexibility will further enable Chevron to leverage what is arguably the strongest balance sheet in the business through whatever cycle the oil market can throw at it.

Note that Chevron's US Upstream Segment delivered $896 million in earnings during the quarter. That's because even though the realized price fell yoy, Permian production was up significantly and while unit costs in the Basin continue to decline as Chevron leveraged significant large-scale efficiencies in the Basin. EURs continue to increase in both the Delaware and Midland Basins:

Source: Q2 EPS Report

Note that Chevron does not flare in the Permian and the realized gas price was $0.60 in Q2 due to the lack of adequate pipeline exit capacity out of the region. But note that is changing.

Source: World Oil & EIA

Last week, World Oil reported that the Permian's Waha hub in western Texas settled at $1.55/MMBtu on August 15, the highest price since March 2019. This price jump coincides with the 2 Bcf/d Gulf Coast Express Pipeline preparing to enter service. The pipe will provide much-needed additional natural gas takeaway pipeline capacity from the Permian region of western Texas and southeastern New Mexico. Chevron will be a big beneficiary of higher gas prices in the region given its high-level of production and the outlook for continued production growth.

Summary & Conclusion

Chevron continues to deliver the goods for shareholders - both operationally and financially. Management continues to emphasize dividends directly to shareholders as opposed to share repurchases - and that is refreshing. It's hard to get overly enthusiastic about an integrated energy major these days given:

  • The energy sector being the most unloved of all sectors,
  • the incorrect view that EVs are significantly affecting gasoline demand (they certainly are not, at least not yet), and
  • there is just too many producers capable of producing too many petroleum molecules.

The last is really the one that matters most. After all, if oil and gas prices were significantly higher, investors would return to the sector in droves. But as I have been pointing out for some time now, we live in an age of energy abundance. Consider that without Saudi Arabia and Russia keeping millions of barrels off the market, WTI would likely be under $40/bbl, or perhaps even under $30/bbl. That said, if investors have to own an integrated oil company, Chevron appears to be the cream of the crop. I expect the company to earn close to $8/share this year. And much of its FCF will find its way directly into the hands of shareholders in the form of dividends.

Source: Yahoo Finance

Disclosure: I am/we are long CVX, COP. 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: I am an engineer, not a qualified investment advisor. While the information and data presented in my articles are obtained from company documents and/or sources believed to be reliable, they have not been independently verified. Therefore, I cannot guarantee its accuracy. I advise investors to conduct their own research and/or consult a qualified investment advisor. I explicitly disclaim any liability that may arise from investment decisions you make based on my articles. Thanks for reading and I wish you much success with your investments.