Chevron expects the combination of new higher-margin projects along with ongoing cost reductions and operational improvements

Business Strategy & Outlook

Chevron is to deliver higher returns and margin expansion thanks to an oil-leveraged portfolio as well as the next phase of growth, which is focused on developing its large, advantaged Permian Basin position. Its latest capital plan maintains its focus on capital discipline without sacrificing growth. Thanks to improved cost efficiencies and the acquisition of Noble Energy, Chevron plans to grow production to over 3.5 million barrels of oil equivalent per day by 2026 from 3.1 mmboe/d in 2022. New volumes will largely come from new production from its differentiated Permian Basin position (size, quality, and lack of royalties), where it expects to grow volumes to over 1 mmboe/d by 2025 from 608 mboe/d in 2020 while delivering returns in excess of 30% and over $4 billion of free cash flow by 2026.

Chevron’s Permian growth will be supplemented by expansion projects at Tengiz in Kazakhstan, due to begin producing in mid-2023, new developments in the Gulf of Mexico, and potential new discoveries in Mexico and Brazil. Chevron also now has growth options with offshore gas fields in the Eastern Mediterranean with the Noble acquisition. Oil and gas prices will dictate Chevron’s earnings and cash flow for the foreseeable future. However, the company is investing in low-carbon businesses to adapt to the energy transition. It recently tripled its investment to $10 billion cumulatively by 2028, with this

capital flowing to emerging low-carbon areas that fit with Chevron’s existing value chains and experience. Greenhouse gas reduction projects and carbon capture and offset will enable Chevron to achieve its emission targets while investments in hydrogen and renewable fuels will give it a toehold in emerging businesses that could expand in the future.

Financial Strengths

Chevron carries relatively little debt, with a net debt/capital ratio below 10%, one of the lowest among its peer group. It is targeting a debt/capital ratio of 20%-25% through the cycle and estimates that in a low-price oil scenario of $50/bbl, the ratio will remain within that range. The company makes maintaining and increasing the dividend a priority; as such, there’s steady growth during the next few years as free cash flow rises. Chevron has reduced its break-even level so that free cash flow allows for dividend growth and repurchases at $50/bbl, implying that it has ample cushion if oil prices fall below that level. If need be, Chevron could always take on debt to defend the dividend, given its low leverage levels. At higher oil prices, Chevron can generate excess cash flow that would go toward repurchases. With debt at desired levels, Chevron introduced an annual repurchase of $2 billion-$3 billion in the second quarter of 2021, which management later increased the upper end of the range to $5 billion and then $10 billion. Its most recent guidance and quarterly run rate is for $15 billion of repurchases annually, which it aims to maintain through the cycle, even relying on debt if necessary. In a $75 price environment through 2026, Chevron estimates it can generate enough free cash flow to repurchase 25% of its outstanding shares. Capital spending is expected to be below $15.3 billion in 2022 while remaining between $15 billion and $17 billion per year through 2026.

Bulls Say

Free cash flow growth is expected to accelerate beyond 2021 as capital spending remains capped while Permian production could nearly double and expansion at Tengiz adds volumes.
Chevron’s large Permian position is mostly composed of legacy acreage, meaning the firm did not overpay to enter the play; 75% has no or a low royalty rate, giving it a cost advantage.
Chevron should realize improved downstream earnings and returns as conditions in its California refineries improve and new chemical production capacity is added via its CPChem joint venture.

Company Description

Chevron is an integrated energy company with exploration, production, and refining operations worldwide. It is the second-largest oil company in the United States with production of 3.1 million of barrels of oil equivalent a day, including 7.7 million cubic feet a day of natural gas and 1.8 million of

barrels of liquids a day. Production activities take place in North America, South America, Europe, Africa, Asia, and Australia. Its refineries are in the U.S. and Asia for a total refining capacity of 1.8 million barrels of oil a day. Proven reserves at year-end 2021 stood at 11.3 billion barrels of oil equivalent, including 6.1 billion barrels of liquids and 30.9 trillion cubic feet of natural gas.

(Source: Morningstar)

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