Updated by Bob Ciura on January 24th, 2019
Chevron is one of the largest and most well-known oil corporations in the world.
It is also one of the most stable. In fact, Chevron is a member of the exclusive Dividend Aristocrats – a group of 53 elite dividend stocks with 25+ years of consecutive dividend increases.
Due to the industry’s reliance on high commodity prices for profitability, there are just two energy stocks on the list of Dividend Aristocrats. Chevron’s dividend consistency and stability help it to stand out in the otherwise-volatile energy industry.
This article will analyze the long-term investment prospects of Chevron in detail. Before reading, you may want to examine Chevron’s long-term fundamentals, which are charted below:
Chevron is one of six oil and gas supermajors, along with:
- BP (BP)
- Eni SpA (E)
- Total SA (TOT)
- Chevron (CVX)
- Exxon Mobil (XOM)
- Royal Dutch Shell (RDS-B)
Chevron is one of only two of the top six oil and gas supermajors to be headquartered in the United States, along with fellow Dividend Aristocrat Exxon Mobil. Like the other integrated supermajors, Chevron engages in upstream oil and gas production, as well as downstream refining businesses.
After a difficult period for the oil and gas supermajors from 2014-2016, when oil prices sank from over $100 per barrel to under $30 per barrel, the industry enjoyed a recovery last year. Trends meaningfully improved throughout the year.
Source: Investor Presentation
In early November (11/2/18) Chevron reported strong third-quarter earnings. Revenue of $44 billion increased 22% from the same quarter a year ago. Revenue growth was due to higher oil and gas prices, as well as a huge boost in production. Chevron had record quarterly oil-equivalent production of 2.96 million barrels per day, 9% higher than a year ago. Not surprisingly, the upstream segment benefited the most from rising commodity prices. Earnings in the upstream segment soared from $489 million to $3.4 billion in the quarter.
Chevron is one of the largest publicly-traded energy corporations in the world and stands to benefit tremendously from the continued rebound in oil prices. In addition, the company has invested heavily in new projects, many of which are set to ramp up over the next year. Chevron is expecting 7% production growth for 2018 before the impact of asset sales, with continued growth in 2019 and beyond. The company’s projected net production over the next several years can be seen below.
Source: Investor Presentation
The rebound in oil prices from the 2016 lows has fueled significantly higher cash flow for Chevron. According to the company’s third-quarter conference call, cash flow from operations for the quarter was $9.6 billion, or $9.2 billion excluding working capital effects. Cash flow from operations totaled $21.5 billion through the first three quarters, an increase of approximately 48% from the same nine-month period the previous year. In the third quarter, operating cash flow grew to its highest level in nearly five years.
Indeed, we believe that Chevron is well-positioned to continue paying steadily rising dividends for years to come. The dividend is one of its major financial priorities. Chevron maintained a debt ratio of 19% in the most recent quarter, with a long-term target of 20%-25% moving forward. A low level of debt will help improve the sustainability of the dividend payout.
Chevron’s growth will come primarily from rising oil prices. In addition, new projects will fuel growth. Third quarter 2018 production was 2.96 million barrels per day, an increase of 239,000 barrels from the same quarter last year. Approximately 237,000 barrels of this production growth came from major capital projects, specifically the Wheatstone and Gorgon liquified natural gas project in Australia.
Shale production increased 155,000 barrels per day, primarily due to growth in the Midland and Delaware Basins, up 80% from the previous year.
Over the long run, we believe that growth of at least 5%-6% per year is likely for this high-quality company.
Competitive Advantages & Recession Performance
Chevron’s competitive advantage in the highly-cyclical energy sector comes primarily from its size and financial strength . The company’s operational expertise allowed it to successfully navigate during 2014-2016, one of the worst oil bear markets on record.
Chevron’s aggressive cost-cutting efforts helped it maintain consistent profitability. Chevron reduced its capital expenditures and exploratory budget from ~$10 billion to ~$5 billion between fiscal 2014 and fiscal 2015. The company has continued to reduce drilling costs, making it more profitable even if oil prices do not get back to $100 per barrel.
Source: Investor Presentation
Chevron stacks up well among its peer in the energy sector. However, the company is certainly not the most recession-resistant Dividend Aristocrat, as evidenced by its performance during the 2007-2009 financial crisis:
- 2007 adjusted earnings-per-share: $8.77
- 2008 adjusted earnings-per-share: $11.67 (33% increase)
- 2009 adjusted earnings-per-share: $5.24 (55% decline)
- 2010 adjusted earnings-per-share: $9.48 (81% increase)
Chevron’s adjusted earnings-per-share declined by more than 50% during the 2007-2009 financial crisis, but the company did manage to remain profitable during a bear market that drove many of its competitors out of business. This allowed Chevron to continue raising its dividend payment each year of the Great Recession.
Indeed, Chevron’s dividend safety is far above the average in the energy industry. We examine the company’s dividend safety in the following video:
Valuation & Expected Total Returns
Chevron’s expected total returns are more difficult to assess than many of the companies we cover at Sure Dividend. This is primarily due to the fact that the company’s current earnings situation seems lower than under a more normal oil price environment.
The company’s long-term valuation history can be seen below:
Note: The price-to-earnings ratio has come down to ~14 from 14.7.
Chevron is now trading at a price-to-earnings ratio of 14 using expected 2018 EPS of $8.09, which is slightly lower than its 10-year average of 15.1. As a result, shares of Chevron appear to be slightly undervalued right now. We believe the stock is likely to incur a modest 0.5% annualized boost due to valuation expansion over the next five years.
In addition, shareholder returns will be fueled by expected earnings growth of 5%-6% per year, along with the current dividend yield of 4.0%. In all, total expected returns are 10% per year for Chevron over the next five years. This is a strong expected rate of return for a high-quality Dividend Aristocrat.
Chevron is one of the rare oil and gas companies that was able to navigate through both the Great Recession of 2007-2009 and the oil downturn of 2014-2016, without cutting its dividend. It has even managed to grow its dividend, including a 4% increase in 2018.
Oil prices have reversed course in recent months, and have declined back toward $50 per barrel in the United States. Fortunately, Chevron has continued to lower its cost structure to handle lower commodity prices. New projects in the U.S. and international markets will also help the company continue to grow cash flow.
Chevron stock appears to be slightly undervalued, with a positive outlook that calls for total returns of approximately 10% per year. This makes Chevron stock a buy for long-term dividend growth investors.