Chevron is a quality investment with a strong management team that has a history of looking out for shareholders.
Investors clamoring for the energy markets have invested in the company with its quality management team.
We see the company’s dividends as valuable, but they’re a significant part of its total return potential.
Given how expensive the company is, we recommend no longer actively buying shares.
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Justin Sullivan/Getty Images News Chevron (NYSE: CVX ) is a $225 billion crude oil company, one of the largest in the world. The company’s size means it’s now almost 90% as large as its competitor Exxon Mobil (NYSE: XOM ). However, as we’ll see throughout this article, Chevron is an interesting investment, but one that’s less interesting especially versus undervalued peers such as Exxon Mobil (discussed here) . Chevron Portfolio
Chevron has an impressive portfolio of assets distributed throughout the world. Chevron has an impressive portfolio of assets. The company has a diverse upstream portfolio with a variety of production operations and exploration along with major downstream and chemical assets. These resilient assets are large-scale and low-cost and many have a multi-decade time period with the ability to drive significant rewards.
This impressive portfolio of assets highlights the strength and longevity of the company’s cash flow. Chevron Cash Flow Generation Potential
Chevron has significant cash flow potential highlighting how the company is a valuable investment. Chevron Cash Flow – Chevron Investor Presentation
Chevron has significant cash flow potential. The company at $40 Brent plans to utilize additional debt, with its expectation for downside net debt peaking at ~35%. On the upside, at $60 Brent, the company will aim to increase dividends and provide additional shareholder rewards without utilizing excess debt.
That’s significant cash flow generation. The $225 billion company will aim to pay out roughly $50 billion in dividends. That’s 22% across 5 years, or roughly 4.4% / year. It’ll spend $80 billion on cash capital expenditures, or 7% annualized; however, it hasn’t broken up what % is maintenance versus growth capital spending for the $16 billion annualized.
However, we expect a significant % to be maintenance capital based.
After that is the expected additional excess cash, or roughly $25 billion, which represents 11% of the company’s market capitalization over the 5-year period. That amounts to just over 2% annualized. Putting this all together, the company will aim to pay out a 6.5% cashflow yield with an additional 7% spent on capital through a mix of maintenance plus growth capital. Chevron Valuation
Chevron is a quality company, but in our view, it’s an expensive company for investors.
The company’s anticipated direct cash returns over the next 5 years is 6.5% primarily through the company’s dividend. The company plans to invest 7% of its market cap annually into maintenance + growth capital which will allow for some cash flow growth, to the tune of near 10% total returns for investors in the company.
That means, best case scenario, the company would provide shareholders returns that line up to historic returns of the S&P 500. That’s at $60 / barrel Brent, so there’s definitely upside potential if prices stay at $70+ / barrel. It also doesn’t count the value of long-term growth and its ability to generate a higher ROCE. Our View
Our view is that the company is a valuable investment. However, it’s not worth buying additional shares at this time.
Chevron will generate roughly 10% returns at $60 / barrel Brent. There’s still some potential variance here. The company hasn’t highlighted what it plans to do with the extra 2% of cash. However, its history indicates that it’ll likely buy back shares. The company is investing heavily; however, the growth versus maintenance breakdown remains to be seen.Still with market matching 10% returns at $60 / barrel Brent, and the oil markets historic volatility, there’s a chance for returns below the market average. We don’t recommend selling investments at this time and paying taxes; however, we don’t recommend making additional investments at the current valuation. Thesis Risk The risk to the thesis with Chevron is that the company has a quality management with a strong history of generating valuable shareholder rewards. The company could continue to outperform even given its current valuation, which is a risk for those who don’t take the opportunity to invest more at this time. Conclusion Chevron is a valuable […]
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