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For the past ~7 years, Chevron's (CVX) less than stellar returns on capital have tested investors' patience. This period of weak returns is the result of years of heavy investment followed by years of low commodity prices. CVX, however, has reset its cost structure. Massive offshore projects that cost billions of dollars over several years before CVX can even generate any cash flow are now a thing of the past. Having significantly deleveraged its Balance Sheet to a 10.8% Net Debt Ratio as of March 31, 2022, CVX can now increase it closer to 20% - 25% to aid with share buybacks.
In my July 22, 2021 post, I explain why investors should buy CVX; shares were trading at ~$99. Shares are now trading at ~$160 and investors might be wondering if CVX is an attractive investment. A company's share price viewed in isolation, however, is not meaningful. It is far more important to look at a company's underlying fundamentals, outlook, and valuation.
I last reviewed CVX in this January 29, 2022 post following the release of Q4 and FY2021 earnings. The April 29, 2022 release of Q1 2022 results and FY2022 outlook make this an opportune time to revisit CVX.
Financials
Q1 2022 Results
Q1 2022 material is accessible here. (Form 8-K, Earnings Supplement and Earnings Presentation).
The financial highlights for Q1 2022 reflect continued improvement in overall performance.
A third consecutive quarter with free cash flow (FCF) over $6B enabled CVX to return $4B to shareholders and reduce debt.
Source: CVX - Q1 2022 Earnings Presentation - April 29, 2022
CVX's 10.8% net debt ratio is because cash and cash equivalents of $11.671B are running higher than the norm. It, however, will be making two large cash disbursements shortly.
- the ~$3.15B all-cash acquisition of Renewable Energy Group with a mid-year closing.
- the redemption of ~$3B of bonds because it makes economic sense.
CVX also plans to accelerate share repurchases and share buyback guidance is now at the upper end of the $5B - $10B. The funding of share buybacks will also come from leveraging the balance sheet closer to the 20% - 25% net debt ratio range.
Outlook
Details of CVX's mid and long-term outlook are shared in the 2022 Chevron Investor Day presentation.
My view on the oil and gas industry's outlook is found in my July 22, 2021 post.
A couple of years ago, the International Energy Agency (IEA) stated we would not need more oil and gas going forward and that investment in new oil and gas exploration should be abolished by the end of 2020. Fast forward to 2022 and the IEA has reversed its message and is now calling on oil producers to churn out more oil and gas.
The demand for oil remains robust. Nations in the developing world have not yet had the chance to reap all the economic and social benefits of advanced economies. They argue that developed countries have no right to deny the developing countries these benefits. As a result, the demise of major oil and gas companies such as CVX appears to be greatly exaggerated.
Credit Ratings
The outlook for CVX's senior unsecured domestic currency debt ratings is stable; the ratings are the same as in my last post.
- 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
CVX has increased its dividend for 35 consecutive years.
According to CVX's dividend history, the next $1.42 quarterly dividend is to be distributed on June 10, 2022 to shareholders of record as of May 19, 2022.
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 $1.42 quarterly dividend yielded ~4.35% based on the $130.50 share price when I wrote my January 29, 2022 post.
Shares are now trading at ~$160 thus resulting in a ~3.6% dividend yield.
Shareholders can likely expect meaningful and sustainable dividend increases over the next few years. An increase in the quarterly dividend to $1.52 from the current $1.42 commencing with the January 2023 dividend seems realistic. If this occurs, investors would receive $5.78 in FY2023 which is a ~3.8% dividend yield based on the current share price.
CVX has repurchased shares in 14 of the last 18 years at an average price in the mid $80s.
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.
In Q1, CVX issued $4.6B for share-based compensation. CVX typically pays out our long-term incentive compensation in Q1 of which a portion is in the form of restricted stock and performance shares. This happens annually, but this year CVX received over $4B in cash when about 3,000 current and former employees exercised stock options; the Q1 2022 proceeds from option exercises were over 4 times the historical annual average of around $1B per year. This is because of CVX's higher stock price.
Roughly two-thirds of the vested options at FYE2021 were exercised during Q1 2022 thus lowering the potential future rate of dilution. Over time, CVX expects share buybacks to more than offset the Q1 dilutive effect.
At its Investor Day in March 2022, CVX increased its share buyback guidance from ~$3B annually to ~$5B - ~$10B. In Q1, CVX repurchased $1.3B of its shares which puts it on track to reach the lower end of its share buyback guidance. However, CVX has recently informed the investment community of its intent to repurchase closer to ~$10B in FY2022.
As noted earlier, CVX plans to accelerate share repurchases by leveraging the balance sheet closer to the 20% - 25% net debt ratio range.
Buybacks can change quarterly and the goal is not to maximize the buyback rate in any individual quarter. Rather, CVX sets a buyback range at a rate it can maintain across the commodity cycle.
Valuation
CVX's FY2011 - FY2021 PE levels are 7.88, 8.12, 10.22, 10.33, 19.51, N/A, 36.50, 14.64, 17.29, N/A, and 22.65. The years in which PE levels are N/A are when CVX reported a loss.
When I wrote my July 22, 2021 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 1, 2021 post, CVX was trading at ~$114.50. 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.
When I wrote my January 29, 2022 post, the current adjusted earnings estimates and forward adjusted diluted PE valuations using the current ~$130.50 share price were:
- 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.
CVX is now trading at ~$160 and the current adjusted earnings estimates and forward adjusted diluted PE valuations are:
- FY2022: mean of $14.72 and a low/high range of $8.85 - $21.52 from 28 brokers. The forward adjusted diluted PE using the mean estimate is ~10.9.
- FY2023: mean of $13.16 and a low/high range of $6.68 - $24.55 from 25 brokers. The forward adjusted diluted PE using the mean estimate is ~12.2.
- FY2024: mean of $11.74 and a low/high range of $6.70 - $15.87 from 17 brokers. The forward adjusted diluted PE using the mean estimate is ~13.6.
Final Thoughts
My final thoughts presented in my January 29, 2022 post are unchanged.
When I wrote my July 22, 2021 post, I felt the demise of the oil and gas industry was greatly exaggerated and strongly recommended investors load up on CVX. Regrettably, CVX's share price has subsequently risen considerably. Its valuation, however, still appears to be fair.
There is consistently a huge disparity in earnings estimates from the brokers which cover CVX! The supply/demand dynamics should persist over the next few years which leads me to believe the low estimates are unrealistically low.
At the time of my previous reviews, CVX's planned share buybacks were significantly lower than current plans. If CVX increases its net debt ratio to the 20% - 25% range from the current 10.8% to assist with share repurchases, the average number of outstanding shares should decline significantly. This should enhance CVX's EPS which could lead to attractive shareholder returns.
CVX was my 4th largest holding (and continues to be) when I completed my investment holdings review in early January 2022. Although I like CVX as a long-term investment, I am limiting any increase in my exposure to the shares I receive from the automatic reinvestment of quarterly dividends. This is because my focus is on acquiring shares in great companies which are experiencing headwinds and have fallen out of favour with investors.
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.
