Chevron’s financials make it a major player

May 17, 2018 08:00 AM

With a market cap of $217 billion, Chevron (CVX) competes with the likes of Exxon (XOM), Shell (RDSA), BP and Total (TOT). CVX consistently ranks among the lowest cost producers in its nine-company peer group. Strong production growth is anticipated in 2018 and 2019. The stock has an upside target of $153 per share, a 34% increase over current prices during the next 12 months, assuming a $60 per barrel WTI oil price with a $3 Brent premium, and its six-year average 8.8x cash flow multiple on 2019 estimated cash flow of $17.44 per share. The stock also has support from an attractive dividend yield.

CVX has proven reserves of 11.7 billion barrel equivalents, comprised of 56% liquids and 44% natural gas. Much of its gas production is sold as liquefied natural gas (LNG) linked to oil prices, with 29% of its liquid reserves in the United States and 27% in its TCO affiliate in Kazakhstan. Australia accounts for 44% of its natural gas reserves with the rest well-diversified across the globe. 

Its 2017 operational cash flow was
$20.5 billion, up 58% from 2016. Capital spending was $13.4 billion and the dividend requirement was $8.1 billion. Despite the severe 3.5-year decline in crude oil prices and earnings, its balance sheet remains strong with an 18% debt ($33.5 billion)/debt + equity ratio. 

With a $63 per barrel Brent oil price, 2018 cash flow is likely to exceed $33 billion. Proceeds from asset sales are expected to add around $2.5 billion annually over the next few years. CVX’s 2018 capital spending budget is $18.3 billon. It expects to spend about $19 billion in 2019 and 2020.

During the last 12 months, CVX is up 7% compared to a 3% decline in the XLE energy sector exchange-traded fund and a 17% increase in the SPX. 

WTI increased 36% from $49 in Q4 2016 when OPEC announced its agreement with Russia and other non-OPEC producers to cut production to the late January peak near $67. It averaged $51 in 2017 and $43 in 2016. The Brent premium blew out to more than $7 in December and has contracted since. 

The run-up in crude to the January peak mirrored the decline in surplus OECD inventories targeted by the OPEC cut. OPEC is pleased with its performance and the result.

Saudi Arabia recently said it “hopes OPEC and its allies (primarily Russia) will be able to relax production cuts next year and create a permanent framework to stabilize oil markets after the current agreement on supply cuts ends. Inventories are likely to remain relatively balanced the rest of the year stabilizing oil prices near current levels, which is good as 75% of Chevron’s production is linked to oil prices.

CVX’s 2017 production increased 6%, driven by the ramp up of its massive Gorgon and Wheatstone LNG projects in Australia and rapid growth in the Permian Basin. 

CVX anticipates annual production growth between 4% and 7% through 2020 based on a $60 per barrel oil price. Its 2018 production will benefit from a further ramp-up in Australia and a larger increase in the Permian to support a 6% increase in total production.

CVX holds a 64% interest in the
$34 billion Wheatstone LNG project. Train 2 of the project is expected to start in Q2 2018. More recent discoveries at its 67% owned Clio and Acme prospects will support future expansion opportunities. Wheatstone is slated to form the basis of a regional LNG hub with ultimate capacity of 25 million tons, which would likely also process gas owned by others.

CVX also has a 17% interest in the non-operated North West Shelf Venture in Western Australia, of which 70% is sold as LNG to Asian customers under long-term contracts. 

Total 2018 Australia segment production is expected to increase 44%. CVX ranks as the third largest LNG producer behind Shell and Exxon. Over 80% of CVX’s Gorgon and Wheatstone LNG is under long-term contract indexed to Brent crude oil.

CVX has a diversified and balanced portfolio of quality upstream and downstream assets plus a very strong balance sheet. Upstream operations will generate about 75% of its 2018 earnings. Its attractive dividend yield provides downside support as well as an inflation hedge tied to oil prices.  

About the Author

Paul Kuklinski, founder of independent research firm Boston Energy Research, selects equity investments in the energy sector for major institutional investors. For a copy of the complete analysis, e-mail