Many drivers across the country have seen the iconic Chevron Corp. (CVX, Financial) logo and brand of gas stations across the country. But very few understand the size and scale of the company.
Chevron is an enormous integrated energy company with exploration, production and refining operations worldwide. It is the second-largest oil company in the U.S. with production of 3 million of barrels of oil equivalent a day, which is comprised of 7.7 million cubic feet a day of natural gas and 1.4 million of barrels of liquids a day.
Production activities take place in North America, South America, Europe, Africa, Asia and Australia. Refineries are located in the U.S. and Asia for total refining capacity of 1.8 million barrels of oil a day. Proven reserves at year-end 2022 stood at 6.1 billion barrels of liquids and 30.9 trillion cubic feet of natural gas.
The company currently has a market capitalization of $306 billion.
Lower carbon initiatives
Almost every oil and gas company has had to capitulate to the environmental pressures of lowering its carbon footprint. Although fossil fuels will be necessary to drive the global economy for 100 years or more, it is essential that large oil conglomerates adopt to the new demands of lowering their carbon emissions.
Chevron's environmental and energy transition efforts focus on lowering the carbon intensity of all operations, building more lower-carbon businesses, supporting effective climate policy, water management responsibility and increasing biodiversity.
In terms of sustainability, the company’s long-term goal is a 35% reduction in upstream (drilling) carbon intensity. They also hope to reduce over 30 million metric tons of carbon dioxide equivalents by 2028.
Financial review
The company reported second-quarter earnings on July 28, which showed reported earnings of $6 billion and adjusted earnings of $5.8 billion.
Second-quarter earnings decreased compared to the prior-year quarter, primarily due to lower upstream realizations and lower margins on refined product sales. Operating revenue was $47.2 billion, which was a decrease from $65.4 billion in the year-ago period primarily due to lower oil and gas prices. Global oil production was up 2% percent from the year-ago quarter primarily due to record Permian Basin production of 772,000 barrels of oil equivalent per day.
Capital expenditures increased 18% from a year ago, primarily due to higher investments in the domestic markets.
Capital returned to shareholders came in at a record $7.2 billion, including dividends of $2.8 billion and share repurchases of $4.4 billion, or approximately 27 million shares.
The balance sheet remains strong with cash and investments of $9.6 billion and total debt of $21.5 billion. The debt-to-equity ratio stood at 12% on a reported basis and only 7% on an adjusted basis.
Chevron Chairman and CEO Mike Wirth said, “Our quarterly financial results remain strong, and we returned record cash to shareholders. The company has delivered more than 12 percent ROCE for eight straight quarters and returned $7.2 billion to shareholders in the quarter, an increase of 37% from the year-ago period.”
The company has set long-term goals from both a financial perspective and in terms of environmental progress. Financially, the company hopes to generate a sustainable level of return on capital employed greater than 10%. Currently, that level is in the 13% to 14% range. In addition, Chevron hopes to generate a 10% compound annual growth rate on cash flow from operations and create $25 billion in excess cash over that time period.
Valuation
Energy companies typically sell at lower price-earnings ratios due to the natural cyclicality of oil prices. Chevron sells at 13.6 times 2023 earnings estimates and 12.8 times 2024 estimates. The company sells at an enterprise value/Ebitda ratio of 5.9 this year, which is in line with industry averages.
Chevron has a long history of paying quarterly dividends going back many decades. Currently, the annual dividend is $6.04, which provides an above-average dividend yield of 3.86%. Based on forward analyst earnings per share estimates of $11.66, the dividend is well covered with a payout ratio of 52%.
There are 17 Wall Street analysts that cover the company with an average price target of $184.47. The high price target is $212 and the low target is $163.
Guru trades
Gurus who have purchased Chevron stock include Ken Fisher (Trades, Portfolio) and Charles Brandes (Trades, Portfolio). Investors who have sold out of or reduced their positions include the Smead Value Fund (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio).
Warren Buffett (Trades, Portfolio) has taken a large position in the company that is worth approximately $21.6 billion today, or about 6.9% of the outstanding stock. The purchases began in the fourth quarter of 2020.
Summary
Chevron remains a solid long-term investment opportunity as commodity prices remain elevated. With an improved cost structure, free cash flow will remain elevated, which will allow for the company to return capital to shareholders through dividends and share buybacks. The fossil fuel industry is often under attack, but will remain a crucial component of the global economy for many decades to come.
