Chevron Stock: Still Valuable With The Overall Recovery

Summary

• Chevron is joining several other companies in the announcement of increased share buybacks.
• The company has the cash flow to keep buybacks near $5 billion (~2.25% float) + keeping paying a near 5% dividend.
• Chevron's combined investments in the business should earn near double-digit shareholder returns.
• In an expensive market, Chevron is an undervalued investment that can drive reliable near double-digit returns.
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Chevron (NYSE: NYSE:CVX) has intelligent management, meaning the company's share price has often outperformed many of its peers in the oil and gas industry. The company recently announced its new capital plan, coming in at $15 billion (the lower end of $15-20 billion guidance). At the same time, the company has announced buybacks in the $3-5 billion range.

Chevron Portfolio

Chevron, as one of the oil majors, has a massive and well-distributed portfolio.

Chevron Assets - Chevron Investor Presentation

Chevron's operations are spread across dozens of countries. The majority of the company's major downstream and chemical facilities are in major transit, production, or consumption centers. The company is focused on massive long-lived assets like Tengizchevroil, and is focused on consistently improving its portfolio and reducing its costs.

The company has 84 billion in 6P reserves, and produces roughly 1 billion barrels /day. The company had a consistent reserve replacement ratio showing the strength of its assets.

Chevron Return on Capital

With this portfolio, Chevron is focused on generating strong returns on capital for shareholders.

Chevron Return on Capital - Chevron Investor Presentation

The company, due to COVID-19, expected to earn roughly 3% ROCE in 2020. That's a result of significant pricing struggles. That's expected to grow significantly going into 2025. At $50 / barrel from cost & margin improvements and capital efficiency the company should see its ROCE move towards 8%. At $60 / barrel that moves towards 10%.

Even with recent pricing struggles, Brent is at $70 / barrel. That's on the company's substantial $15 billion in planned 2022 capital expenditures. It represents 50% growth from the company's 2021 capital expenditures. Those capital expenditures will have roughly $800 million in annual low carbon investments.

Chevron Shareholder Return Potential

The company, putting this all together, has significant shareholder return potential.

Chevron Shareholder Returns - Chevron Investor Presentation

At $60 Brent from 2021-2025, the company plans to continue paying its almost 5% annual dividend yield. The company will invest heavily in its business, which has the potential to drive long-term shareholder returns. it'll also be left with $25 billion in extra cash. At $70 Brent, that $25 billion excess cash turns into $50 billion.

The company is currently committing to almost $5 billion in share buybacks annually. That's enough to buyback more than 2% of its shares annually, pushing its total shareholder yield to 7%. At $70 Brent the company's ability to drive shareholder rewards will be closer to 10%. Share buybacks also help save on dividend expenses.

At a downside scenario of $40 Brent, the company sees net debt peaking at ~35%. That's an incredibly manageable level for the company. The takeaway here is that Chevron at current prices has the ability to drive reliable near double-digit shareholder returns. In an expensive market, with P/E ~30x, that's a reliable long-term yield.

Chevron Low Carbon Business

Chevron has started investing heavily in its low carbon business.

Chevron Low Carbon Business - Chevron Investor Presentation

The company is planning to invest $3 billion by 2023 and $10 billion by 2028 in a wide variety of efforts. The company expects this will lead to 30 million annual tonnes of CO2 reductions, a substantial reduction. At the same time, the company is expecting that this will lead to a substantial business for the company with cash flow potential.

The company sees the potential for >$1 billion in project annual CFFO by 2030. That's fairly strong returns and highlights how this can be a growing source of investment for the company.

Chevron Risk

Chevron's management is top notch, and as a result, they have minimal risks as a company. In fact, from a management perspective, they tend to get a higher valuation as a result. Instead, their biggest risk is simple - average Brent crude prices. At $60+ / barrel Brent, averaged for the next decade, they're heavily undervalued. We feel that's a likely pricing scenario.

However, the oil industry is heavily fragmented, and companies in low cost basins (like the Permian) are willing to rapidly increase production where profitable. Additionally, long-term oil demand is expected to decline, we're near peak oil. Those are risks that investors should pay close attention to when looking.

Conclusion

Chevron has an impressive portfolio of assets. The company has a multi-decade reserve life and low cost production. At $40 / barrel Brent, the company is close to covering capital expenditures and its respectable dividend of almost 5%. That's a fairly strong asset base and pricing scenario as a worst case average for investors.

Looking forward, at $60 - 70 Brent average for the next 5 years, the company has the ability to drive much more substantial shareholder rewards. The company has one of the best positioned management teams in the industry and towards a 10% yield at $60 Brent. In an expensive industry, that's worth investing in.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CVX either through stock ownership, options, or other derivatives. 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.

Comments

[jakied]

Will the div be raised to 1.45/q in Jan?

[PT Larry]

The Value Portfolio….. “The company has 84 billion in 6P reserves”. What does this mean and not one billion but one million bbl/d produced.

[taplinger]

I never can understand this thinking. Why didn't they do their buybacks last September?

[Why did I choose the airlines]

@taplinger Visability . No way would they risk cash needed in light of what happened. Now that the company has visability its a pure play on acretive earning per share and hogher profits. Stock IMO is undervalued by $50-75

[Slade_01]

Typo: "and produces roughly 1 billion barrels /day"
Now that would be awesome cash flow!

[amusedobserver]

@911Slade You beat me to it.
If this guy doesn't even read what he wrote, why should we?

[i27]

Agreed. Commodities are a main theme, next to healthcare and potentially financials. CVX, XOM, TTE are interesting names with positive dividend carry.