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Is Chevron (CVX) still reasonably valued following the share price run-up over recent months?
In my July 22, 2021 post, I suggested investors acquire CVX shares while they were undervalued; shares were trading at ~$99. I followed up this post with another on November 1, 2021 at which time its shares were trading at ~$114.50. We are now in late January 2022 and CVX is trading at ~$130.
In this post, I look at CVX's recent results and its valuation to determine whether to add to my exposure.
Financials
Q4 and FY2021 Results
On January 28, 2022, CVX released Q4 and FY2021 results (Form 8-K and Earnings Supplement).
Results fell short of market expectations but higher commodity prices aided CVX in posting much better results than those reported in FY2020.
Earnings fell from Q3 levels despite higher prices. Management indicates this is the result of:
- higher depreciation;
- liquefied natural gas trading timing effects; and
- lower chemical results.
FY2021 adjusted earnings of ~$15.6B are the highest since 2014.
CVX has become much more capital efficient. Cost and capital efficiencies are essential to navigate commodity price cycles because it provides resilience through difficult periods and the ability to reap rewards when markets are strong.
CVX reported a record full-year Free Cash Flow (FCF) of $21.1B; this FCF is even higher than in 2008 and 2011 when oil prices were well over $100 a barrel. Its strong performance enabled CVX to repay $12.9B of debt in FY2021.
At the end of FY2020, CVX's debt/net debt ratios were 25.2% and 22.7%. When I reviewed CVX's Q3 2021 and YTD2021 results in November, CVX had recently reported an improvement to 21.6% and 18.7%; the 18.7% was below CVX's 20% - 25% target net debt range. With the release of Q4 and FY2021 results, CVX's debt/net debt ratios are 18.4% and 15.6%. CVX's net debt ratio is now even more comfortably below the target net debt range.
Source: CVX - Q4 2021 Earnings Presentation - January 28, 2022
Q4 results include 3 special items:
- asset sale gains of $0.52B primarily on sales of mature conventional assets in the US;
- $0.26B of losses on the early retirement of debt which will result in significant future interest cost savings; and
- pension settlement costs of $82 million.
Source: CVX - Q4 2021 Earnings Presentation - January 28, 2022
Outlook
Excluding contract expirations and 2022 asset sales, CVX expects a 2% - 5% increase in production.
Management has reaffirmed its prior long-term guidance of a 3% production compound annual growth rate through 2025.
More information is to be shared at the 2022 Chevron Investor Day on March 1, 2022.
Credit Ratings
Despite the significant improvement in the company's financial position, CVX's senior unsecured domestic currency debt ratings remain unchanged and the outlook is stable.
- Moody's: Aa2 (this is the middle tier of the high-grade investment-grade category).
- S&P Global: AA- (this is the bottom tier of the high-grade investment-grade category).
Both ratings define CVX as having a VERY STRONG capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.
Dividend and Dividend Yield
Looking at CVX's dividend history we see 2 dividend increases in 1 year; CVX has increased its dividend for 34 consecutive years.
When I wrote my July 22, 2021 post, CVX was trading at $99 and the dividend yield was ~5.4%. In November 2021, shares were trading at ~$114.50 and the yield was ~4.7%.
The new quarterly dividend is $1.42 and shares are trading at ~$130.50 for a ~4.4% dividend yield. Despite the ~6% dividend increase from $1.34/quarter, the rapid appreciation in CVX's share price makes the dividend yield less attractive than at the time of my previous 2 posts.
Share repurchases rank in priority behind:
- investing in the business;
- maintaining a strong balance sheet; and
- growing the dividend.
CVX has repurchased shares in 14 of the last 18 years at an average price in the mid $80s. With an improvement in the manner in which CVX is being managed, the intent is to be able to maintain buybacks through the cycle. The oil and gas business is cyclical and wild swings in financial results are to be expected.
Share repurchases in Q4 and FY2021 amounted to $0.75B and $1.4B.
On the Q4 earnings call, management indicated that with debt having been significantly reduced, the plan is to repurchase shares at the high end of the company's $3B - $5B share repurchase range.
CVX's diluted weighted average shares outstanding in FY2011 - FY2021 (in millions) are 2,001, 1,965, 1,932, 1,884, 1,875, 1,873, 1,898, 1,914, 1,895, 1,870, and 1,920.
Valuation
CVX has generated YTD diluted EPS of $8.14. With shares trading at ~$130.50, the diluted PE is ~16.
By way of comparison, CVX's FY2011 - FY2020 PE levels are 7.88, 8.12, 10.22, 10.33, 19.51, N/A, 36.50, 14.64, 17.29, and N/A. The years in which PE levels are N/A is when CVX reported a loss.
When I wrote my July 22nd post, I indicated that I expected the 27 brokers who provided FY2021 and FY2022 adjusted diluted EPS guidance would revise their figures upwards following the release of Q2 results. At the time of that post, CVX's valuation based on adjusted diluted EPS estimates and a ~$99 share price was:
- FY2021: mean of $6.32 and a low/high range of $4.95 - $8.50. The forward adjusted diluted PE using the mean estimate is ~15.66 and ~14 if I use $7.
- FY2022: mean of $7.23 and a low/high range of $5.05 - $10.44. The forward adjusted diluted PE using the mean estimate is ~13.7 and ~11 if I use $9.
At the time of my November post, CVX was trading at ~$114.50. The following earnings estimates were reflected in the 2 online trading platforms I use. Based on the wide-ranging estimates, CVX's forward adjusted diluted PE valuations are:
- FY2021: mean of $7.39 and a low/high range of $5.19 - $9.42 from 30 brokers. The forward adjusted diluted PE using the mean estimate is ~15.5 and ~12.2 if I use $9.42.
- FY2022: mean of $8.97 and a low/high range of $6.25 - $12.19 from 31 brokers. The forward adjusted diluted PE using the mean estimate is ~12.8 and ~9.4 if I use $12.19.
The current adjusted earnings estimates and forward adjusted diluted PE valuations using the current ~$130.50 share price are:
- FY2022: mean of $10.05 and a low/high range of $7.57 - $16.49 from 28 brokers. The forward adjusted diluted PE using the mean estimate is ~13.
- FY2023: mean of $9.19 and a low/high range of $5.15 - $14.42 from 21 brokers. The forward adjusted diluted PE using the mean estimate is ~14.
- FY2024: mean of $9.16 and a low/high range of $7.67 - $12.65 from 6 brokers. The forward adjusted diluted PE using the mean estimate is ~14.
There is consistently a huge disparity in earnings estimates from the brokers which cover CVX.
Final Thoughts
Although oil and gas companies face long-term headwinds, I lay out my thoughts on the industry in my July 22, 2021 post. Less efficient industry participants may not survive the next couple of decades. The strong industry participants, however, should do just fine.
I do expect CVX to be a survivor but its results may be volatile. The degree of volatility, however, is likely to be far less than historically because CVX has made and is continuing to make, changes to adapt to the evolving landscape.
CVX has recently reported strong results, albeit below market expectations, and the near-term outlook is positive. Management is taking appropriate action to position the company for when times do get lean again; CAPEX has been scaled back and debt levels are comfortably below the 20% - 25% target net debt range. CVX is certainly in a much better position than 1 - 2 years ago and it is in a far better position than its peers.
Despite a slight pullback in CVX's share price following the release of FY2021 results, its share price remains close to all-time highs as oil prices are likely to continue to rise in the short term. Share price alone, however, is meaningless and investors should focus on valuation.
CVX's current valuation is such that there is little additional room for a marked improvement. I am reluctant to add to what was my 4th largest holding when I completed my investment holdings review in early January 2022. I will limit any increase in my CVX exposure to the automatic reinvestment of dividends.
Instead of adding to my CVX position, I am looking to invest in high-quality companies that have fallen out of favour with the broad investment community.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long CVX.
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decisions without conducting your research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
