Chevron – Macroeconomic Uncertainty To Weigh On Chevron Stock — Trefis
With the progress in mass vaccination across the world, demand for oil & gas trimmed the high inventory levels in the U.S. and OECD countries. In the recent ministerial meeting, OPEC remains committed to curtailing production as a resurgence of coronavirus cases is observed in many places. Thus, Chevron Corporation (NYSE: CVX) along with other integrated and upstream companies have been focusing on capital conservation measures to assist shareholder returns. Recently, Chevron announced a 4% growth in quarterly dividend fairly in-line with the company’s long-term capital return policy. At a $60 Brent price, the company expects to generate $150 billion of operating cash in the next five years with $75 billion allocated as cash capex, around $50 billion for dividends, and $25 billion of excess cash. Given the $20 billion increase in long-term debt last year, due to continued capital spending and dividend payouts, Trefis believes that the stock is unlikely to provide strong gains in the near-term. Our interactive dashboard analysis on Chevron Revenues highlights the historical trends across segments along with the expectations for FY2021.
Oil & gas business will remain the major revenue and earnings contributor
In 2019, the company’s Upstream and Downstream businesses contributed 23% and 77% of the total revenues, respectively. With just $3 billion of capital spend on low carbon businesses in the next couple of years, the company’s oil & gas business is likely to remain the major revenue and earnings contributor. However, the company plans to raise oil & gas production at a single-digit rate and higher benchmark prices are key to excess cash generation for shareholders. Supported by disciplined capital spending and operational efficiencies, the company is targeting an increase in free cash flow from $9 billion in 2020 (normalized to $50 Brent) to $15 billion by 2025 – boosting ROCE (return on capital employed) by 2x.
Increase in OPEC+ production to negatively impact benchmark prices
In the recent ministerial meeting, OPEC has not eased production cuts and plans to gradually increase supply at 0.35 mb/d in June and 0.44 mb/d in July subject to demand growth and macroeconomic stability. Currently, the OPEC consortium’s production is down by 6.5 mb/d, nearly 7% of global production, from the reference level. Per EIA, WTI and Brent benchmarks are likely to trend downward in 2022 due to slow growth in the global economy and higher supply by OPEC.
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