Is Chevron Corporation Stock A Gamble?

CVX: Chevron logo

In the recent ministerial meeting, OPEC and allied nations announced the retention of their earlier directed crude oil production plans despite the sharp surge in benchmark prices. As inflationary pressures pinch household budgets in the U.S. and other nations, oil companies including Chevron Corporation (NYSE: CVX) are likely to benefit from higher cash generation. The company raised $20 billion in debt last year to fund dividends and certain capex requirements – triggering fears of a long-term impact on capital return to shareholders. Notably, the current price environment enables excess cash generation which is likely to assist balance sheet strengthening along with shareholder returns. As the oil & gas production business is expected to remain the primary earnings contributor, the stock is a gamble for investors betting on high benchmark prices in the coming years. Trefis highlights the historical trends in revenues, earnings, and stock price in an interactive dashboard analysis on Chevron Valuation.

Dividend payouts have been a key source of shareholder returns

The average crude oil production price realization by Chevron has ranged from $46/bbl in 2015, $38/bbl in 2016, $48/bbl in 2017, $62/bbl in 2018 to $54/bbl in 2019. Thus, cash flows from operations ranged from $13 billion in 2016 to $30 billion in 2018. Given the volatile price environment, the company has been returning excess cash to shareholders through buybacks when prices were high. In the past five years, the company generated $101 billion of cash from operations, allocated $68 billion for capital expenses, paid $43 billion in dividends, and returned $3 billion through buybacks.

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Should investors bet on buybacks to realize gains in the coming years?

As highlighted in the investor presentation, Chevron expects to generate $150 billion of operating cash in the next five years at $60/bbl of average Brent price. The company targets $50 billion of dividend payouts with $75 billion allocated for capital expenses, and $25 billion of excess cash. At the average realized price of $62/bbl in 2018, the company generated $30 billion of cash from operations and strengthened its balance sheet to repurchase shares the next year. However, the benchmark prices remained high only for a short period – trending downward in 2019 and diving into negative territory during the pandemic. Thus, betting on buybacks to realize long-term gains in Chevron Corporation stock seems like a gamble. (related: Why BP Stock Is A Good Alternative For Oil Investors)

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