VALUATION HIGHLIGHTS

1. Downstream constitutes 75% of the Trefis price estimate for Chevron's stock.
2. Upstream constitutes 18% of the Trefis price estimate for Chevron's stock.

WHAT HAS CHANGED?

Slump In Oil Demand Weighing On Chevron’s Stock

Chevron continued to face the pinch of low benchmark prices and production curtailments during the third quarter. Revenues were down by 30% (y-o-y) with net losses reaching $200 million. The company has announced a dividend of $1.29 per share despite a 60% decline in operating cash flow for the first nine months. Interestingly, the company's dividend payout and share buybacks of $8.7 billion have primarily been supported by $7.7 billion of debt raises this year.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Chevron's value that present opportunities for an upside or downside to the current Trefis price estimate for Chevron:

• Upstream EBITDA Margin: Chevron's upstream division's EBITDA Margin decreased from around 62% in 2012 to 45% in 2015, primarily reflecting the decrease in average price realizations for liquids (Crude oil & NGL). While the low commodity prices weighed on the company's top line in 2016, it managed to significantly reduce its operating costs during the year, which resulted in a boost in its EBITDA margin. The company recorded upstream EBITDA margin of 56% in 2016. However, the margins dropped to 47% in 2017, primarily due to higher commodity prices. They have now eased up to 49% in 2019.
  Going forward, we forecast Chevron's Upstream EBITDA Margin to gradually increase to around 50% by the end of our forecast period, on the back of a steady recovery in global crude oil prices. However, if prices do not increase at the rate projected, and EBITDA margins remains at 45% by the end of our forecast period, there would be a 7.4% downside to our Trefis prices estimate. On the other hand, if prices increase more than expected, resulting in a higher EBITDA margin of 60%, there would be 10% upside to the Trefis price estimate.


• Downstream EBITDA Margin: Chevron's downstream division, which primarily manufactures and sells refined products and petrochemicals, constituted ~70% of the company's operating revenues but just around 26% of its total EBITDA in 2015. This is primarily due to the low EBITDA margins of the division. EBITDA margins for the division depend on the price differential between input (crude oil, ethanol, etc.) and output (gasoline, kerosene, ethylene, etc.). In 2016, the company's downstream operations turned negative due to the recovery in commodity prices. However, it turned positive in 2019, clocking in 0.6%.
  Going forward, we expect downstream margins to improve in the short to medium term, but remain at around 1% in the long run due to overcapacity in the global refining market and declining demand for gasoline in developed markets. However, if Chevron's downstream EBITDA margins increase and reach around 4% by the end of the forecast period, due to a combination of higher growth in demand for refined products in emerging markets and a slower decline in petroleum fuel consumption in the developed economies, there could be a 7% upside to our current price estimate for Chevron.

For additional details, select a driver above or select a division from the interactive Trefis split for Chevron at the top of the page.

BUSINESS SUMMARY

Chevron Corporation is the second largest energy company in the U.S., after Exxon Mobil. The company manages its investments in subsidiaries and affiliates and provides administrative, financial, management, and technology support to U.S. and international subsidiaries that engage in fully integrated petroleum, chemicals, and mining operations, as well as power generation and energy services.

Chevron has operations in 180 countries along with a strong network of retail gas stations under the Chevron, Texaco, and Caltex brands.The company is also involved in pursuing alternative energy solutions.

SOURCES OF VALUE

Crude Oil and Natural Gas Liquids production is by far the most valuable segment for Chevron for the following reasons:

Higher profitability compared to downstream activities like refining

Although, the revenues attributed to crude oil and NGL production are less when compared to downstream businesses like refined product sales, the profitability is much higher. We estimate that EBITDA margins for crude oil and NGL production were around 47% in 2017 compared to 2.5% EBITDA margin for its refined product sales during the year.

The difference in margins is attributable to the fact that the cost of production per barrel is quite low for crude oil compared to its selling price. For 2017, the company's average selling price for crude oil was around $49 per barrel when average production costs were around $11.50 per barrel.

KEY TRENDS

Peak oil

It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.

However, many institutions such as the International Energy Agency (IEA) believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand of energy will be met at all times to come.

Improvements in technology

Due to limited underlying growth in product demand, there has been a movement in recent years towards increasing the complexity of refineries rather than expanding capacity. In the U.S., no new refineries have been built since 1980, however, improvements in process design and technology has seen capacity increase around 1% per year.

The early refineries that were established were mainly used to process light sweet crude resulting in an increase in demand for light sweet crude. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, interest in the development of new cost effective methods for extracting and transporting heavy crude oil, for refining into valuable light and middle distillate fuels, is also increasing.