Chevron Stock: A Rewarding Way To…

Chevron To Cut Up To 7,000 Jobs Due To Slump In Oil Prices

Justin Sullivan/Getty Images News

By Valuentum Analysts

The global energy complex is rebounding from the worst of the coronavirus (‘COVID-19’) pandemic, and that is sending prices of raw energy resources sharply higher. Near-term crude oil futures are now over $80 per barrel as of this writing, which is music to Chevron Corporation’s (CVX) ears. We are enormous fans of Chevron and view both its capital appreciation and income growth upside quite favorably.

Part of the reason why we’ve warmed up to Chevron has to do with its significant free cash flow improvement on a year-over-year basis thanks in part to a combination of improved cash flow from operations and a reduction of capital spending, the best of both worlds. Free cash flow is a core part of the process of evaluating the intrinsic value of an equity as it forms the basis for which any returns can be distributed to shareholders.

Chevron’s free cash flow has improved to ~$14.3 billion ($19.73 billion less $5.45 billion) during the first nine months of 2021 from ~$1.5 billion ($8.34 billion less $6.86 billion) during the same period a year ago, as shown in the image below. Most of the vast improvement in operating cash flow has come from a significant improvement in earnings (+$10.6 billion versus -$4.9 billion in the year-ago period), so this is a very high-quality improvement. We’re liking what we see and expect this trend to sustain itself in the near- to intermediate-term.


Chevron’s free cash flow generation has improved on a year-over-year basis.

Chevron’s 10-K.


Chevron has a sizable presence in the upstream (exploration and production operations involved in extracting raw energy resources from the ground), downstream (oil refineries and petrochemical plants), midstream (energy infrastructure such as pipelines and storage facilities), and marketing (gas stations, distribution networks, and trading operations) segments of the broader global energy complex. We are going to provide a snapshot of some of Chevron’s major operations, though please note this is not an exhaustive list by any means.

The company owns a large economic interest in the Gorgon and Wheatstone liquefied natural gas (‘LNG) export complexes in Australia that primarily supply LNG to major energy consumers in Asia (such as China, Japan, South Korea, and India) and occasionally Europe as well. It also owns oil refineries in Singapore, Thailand, South Korea, California, Texas, and Mississippi that supply refined petroleum products to buyers across the globe.

Back in May 2019, Chevron completed its acquisition of an oil refinery in Pasadena, Texas, from a unit of Brazil’s Petróleo Brasileiro S.A. (PBR), otherwise known as Petrobras, for $0.35 billion (excluding working capital considerations). Reportedly, Chevron is on the hunt for another refinery and is considering making a move for Royal Dutch Shell plc’s (RDS.A) (RDS.B) oil refinery in Anacortes, Washington.

Chevron owns 50% of the Chevron Phillips Chemical (‘CPChem’) joint-venture, a giant in the petrochemical space with plants in Saudi Arabia, Singapore, Belgium, the US, Qatar, and Colombia. Its partner Phillips 66 (PSX) owns the other 50% stake in CPChem. Chevron also has a large upstream presence in the Gulf of Mexico and the Permian Basin in the US, and runs a vast network of gas stations under the Chevron, Texaco, and Caltex brands. On a final note, Chevron owns a 50% stake in the Tengizchevroil (‘TCO’) venture in Kazakhstan that operates two key oil fields in the country including the massive Tengiz oil field.

We are big fans of Chevron’s asset base. On the upstream side of things, Chevron is targeting growth opportunities in the Permian Basin and through a major expansion at its TCO venture. The company also aims to steadily scale up its downstream presence, and may pursue another acquisition of an oil refinery to do so.

Financial Update

Chevron had $6.0 billion in cash, cash equivalents, and current marketable securities on hand versus $0.3 billion in short-term debt and $37.1 billion in long-term debt on the books at the end of the third quarter of 2021. We view Chevron’s ~$31.3 billion net debt load (inclusive of short-term debt) at the end of September 2021 as manageable given its stellar cash flow generating abilities and ample liquidity on hand. Chevron reduced its net debt load by $7.4 billion from the end of December 2020 to the end of September 2021, largely by directing its free cash flows (defined as net operating cash flows less capital expenditures) towards paying down debt. We are huge fans of Chevron’s fiscal discipline.

As noted before, during the first three quarters of 2021, Chevron generated ~$14.3 billion in free cash flow as it benefited from the ongoing recovery in the global energy complex. The company’s total revenues and other income surged higher by 65% year-over-year during this period and its GAAP net income flipped from a loss in the same period the prior year to a profit of $10.6 billion. Chevron generated just ~$1.5 billion in free cash flow during the first three quarters of 2020 as subdued raw energy resources pricing and demand destruction for refined petroleum products, both caused by the COVID-19 pandemic, weighed quite negatively on its financial performance.

Divestments raised $0.6 billion in cash during the first three quarters of 2021, which helped Chevron pay down debt, though we would like to stress here that it was primarily its organic free cash flow generating abilities that enabled the firm to improve its balance sheet. Chevron spent $7.6 billion covering its total dividend obligations during the first three quarters of 2021, allowing for $6.6 billion in “excess” free cash flows after covering those payouts. The company has a nice dividend growth track-record and we expect Chevron will steadily grow its per share dividend going forward (it last boosted its payout by 4% sequentially for the dividend that was paid out in May 2021).

Looking ahead, Chevron’s free cash flow generating abilities should remain robust given that raw energy resources pricing is on a nice upward trend of late. The company’s organic capital and exploratory spending plans for 2022, a proxy for its capital expenditure budget, is quite tame at $15.0 billion. For reference, Chevron spent $14.1 billion on its capital expenditures in 2019, before the pandemic hit. Chevron’s fiscal discipline is a big reason why we are enormous fans of the firm, as that better enables the company to return cash to shareholders.

Management communicated during Chevron’s third quarter of 2021 earnings call (held in November 2021) that the company may step up its share repurchases now that its preferred leverage ratio is back under control. For reference, Chevron aims to keep its net debt to shareholders equity ratio under 20%, and exited the third quarter of 2021 at a ratio of 19%.

Back during its second quarter of 2021 earnings update, Chevron announced it was resuming share buybacks at a pace of $2.0-$3.0 billion per year starting in the third quarter of last year. We appreciate Chevron’s share buyback program, in moderation, given that shares of CVX are trading well below their intrinsic value, in our view.

Our Estimate of Chevron’s Fair Value

Our discounted free cash flow analysis process values each firm on the basis of the present value of all their future forecasted free cash flows while also taking net balance sheet considerations into account as well. Under our “base” case scenario, Chevron has a fair value estimate of $140 per share. Please note that there is ample room for upside here should Chevron outperform our base case scenario, something that we think is likely in the event raw energy resources pricing remain elevated. Under our “bull” case scenario, the top end of our fair value estimate range sits at $175 per share of Chevron.

In the upcoming graphic down below, we lay out the key valuation assumptions used in our enterprise cash flow model covering Chevron under our base case scenario. This should be viewed as a benchmark, as there is room for Chevron to outperform in the current raw energy resources pricing environment.

Our summary discounted cash flow assumptions of CVX.

Our summary discounted cash flow assumptions of CVX.


Though we estimate Chevron’s fair value at about $140 per share, every company has a range of probable fair values that’s created by the uncertainty of key valuation drivers such as future revenue or earnings, for example. When it comes to Chevron, we have to pay very close attention to the volatility of energy resource pricing. After all, if the future (including the price of crude oil, for example) were known with certainty, we wouldn’t see much volatility in the energy companies and the markets as a whole, as stocks would trade precisely at their known fair values.

Understanding how changes in future expectations impacts equity values is essential to understanding how capital markets function and what causes market volatility. For example, if future expectations concerning revenue growth or margin expansion change, the value of the company will change, and so will the buying and selling decisions that drive the price. This is why the discounted cash-flow model can be viewed as a predictive model. It maps to the market’s expectations.

In the upcoming graphic down below, we show a probable range of fair value estimates for Chevron that covers both our upside fair value estimate if energy resource prices continue to advance and our downside fair value estimate in the event energy resource prices start to fall. The midpoint of our fair value estimate range, or our point fair value estimate ($140 per share), reflects the current trajectory and levels of energy resource pricing. The larger the uncertainty, the wider the fair value estimate range.

We think Chevron is attractive below $105 per share (the green line), but quite expensive above $175 per share (the red line). The prices that fall along the yellow line, which includes our fair value estimate, represent a reasonable valuation for the firm, in our opinion. Please note that the upper rung of this range represents our bull case scenario and the lower rung represents our “bear” case scenario. At ~$130 per share, Chevron reveals a positive risk/reward for investors.

A visual representation of the fair value estimate range for Chevron

A visual representation of Chevron’s fair value estimate range.

Valuentum Securities

Concluding Thoughts

There is a lot to like about Chevron. Past deleveraging efforts set the firm up nicely to reward shareholders in the current environment, such as stepping up the pace of its share repurchases. As the top end of our fair value estimate range sits at $175 per share of Chevron, we view the company’s capital appreciation upside potential quite favorably. Furthermore, we also expect that Chevron will steadily grow its payout going forward, aided by the firm keeping its capital expenditure expectations contained as that better enables Chevron to generate free cash flows. As of this writing, shares of CVX yield ~4.2%.


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