Chevron Lines Up Strong Shareholder Returns: Can It Deliver?

At its recently held annual investor meeting in New York, Chevron (NYSE:CVX) outlined a five-year strategic plan. In particular, the company projects a total return to shareholders through dividends and share buybacks of $75-80 billion even without a spike in oil prices. This is substantial, given the San Ramon, CA-based integrated firm’s current market value of $180 billion.

What’s the Strategy?

In order to achieve the massive returns target, Chevron will rely on ‘disciplined capital spending, improved cost efficiency, and continued cash flow growth’.

The company is looking to save $2 billion on the back of tight rein on costs and stronger margins. Meanwhile, Chairman and CEO Michael Wirth aims to keep its capital expenditure flat within the range of $19 billion to $22 billion through 2024. Based on this, the supermajor expects to grow adjusted operating cash flow per share at a 9% CAGR and improve adjusted free cash flow (‘FCF’) per share by 100%.

Chevron’s focus on short-cycle, lower-risk projects – in the Permian Basin, Kazakhstan, and deepwater Gulf of Mexico – should lead to solid earnings and cash flow growth. This will help the company in generating over 10% returns on capital by 2024 at just $60 Brent prices - up more than 300 basis points.

Chevron’s enormous acreage in the Permian Basin - America's top shale formation – will position it well to meet the objectives earmarked. At an annual budgeted capital expenditure of around $4.5 billion, the company targets to ramp up production from the unconventional play to 1.2 million barrels a day by the mid-2020s, following which, output is set to flatten out through 2040. While a number of smaller, debt-laden Permian operators (who relied on borrowings to finance drilling) are struggling to make profits, Chevron, with its sheer scale and high-quality acreage, is largely immune to these issues.

Investor Pressure Leads to Returns Boost

Last year, Chevron paid out $13 billion as dividends and buybacks to its shareholders. Assuming similar distributions over the next five years, the overall payout would have amounted to $65 billion. As such, the American multinational company’s new projection (of up to $80 billion through 2024) represents a hefty increase over the current rate.

Over the past few years, the likes of Chevron and ExxonMobil (NYSE:XOM) have faced the wrath of investors over poor shareholder returns. The so-called ‘Big-Oil’ company managements were under pressure to reduce spending, generate free cash flow and boost shareholder value.

Healthy Balance Sheet to the Rescue

Fortunately, Chevron has a very strong balance sheet – including an AA credit rating – to take care of management’s stated priorities.

As of Dec 31, the company had $5.7 billion in cash and cash equivalents and total debt of $27 billion, with a debt-to-total capitalization ratio of just 15.8%. Moreover, Chevron's total debt is down from $34.5 billion a year ago. Importantly, the company's year-end debt ratio was 16%, improving from 18% at year-end 2018.

Zacks Rank & Stock Picks

Chevron holds a Zacks Rank #3 (Hold).

Some better-ranked players in the energy space are Apache (NYSE:APA) and Hess Corporation (NYSE:HES) that sport a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Apache has surpassed estimates in three of the last four quarters, the average being 119.7%.

The 2020 Zacks Consensus Estimate for Hess indicates 91.6% earnings per share growth from 2019 level.

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