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I last reviewed CVX in my August 18, 2022 guest post at Dividend Power at which time I concluded that the oil and gas demise was overblown.
Following the January 27 release of Chevron's (CVX) exceptional FY2022 results, there appears to be a bit too much euphoria. This certainly was evident when CVX announced its new $75B share buyback program and dividend increase on January 25.
My decision not to add to my CVX exposure does not imply I am souring on what is my 2nd largest holding at 2,193 shares; it was my 3rd largest holding when I completed my last investment holdings review in mid-2022 and my 9th largest holding when I completed a similar review on April 11, 2021. I am not adding to my CVX exposure because I prefer to invest in great companies when they temporarily fall out of favour.
Financials
Q4 and FY2022 Results
On January 27, 2023, CVX released its Q4 and FY2022 results. I reference the Form 8-K, Earnings Supplement and Earnings Presentation.
The financial highlights reflect continued improvement in overall performance.
In FY2022, CVX generated ~$37.6B of Free Cash Flow (FCF). This exceeds the previous high set in FY2021 by more than ~$15B. The surge in FCF is partially attributed to the decision to scale back on offshore exploration and development. Typically, these projects require the expenditure of billions of dollars over several years before any cash flow is generated.
This image reflects how this FCF was deployed.
Source: CVX - Q4 and FY2022 Earnings Presentation - January 27, 2023
CVX's Net Debt Ratio is only 3.3%. This provides it with considerable flexibility as to how best reward shareholders.
Source: CVX Form 8-K - January 27, 2023
Outlook
CVX will hold its Investor Day on February 28. Until such time, the November 2022 Chevron Investor presentation provides considerable information.
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's dividend history is accessible here.
On January 25, CVX declared a $1.51/share quarterly dividend (an increase of $0.09/share or ~6.3%) marking the 36th consecutive year of dividend increases. This dividend is payable on March 10 to all holders of common stock as shown on the transfer records at the close of business on February 16.
Management has indicated a willingness to increase the current rate if conditions warrant but for now, shareholders are likely to receive ~$3.75B in Q1 2023 and ~$15B in FY2023.
With CVX shares currently trading at ~$179.60, the new dividend yield is ~3.36%.
CVX has returned $65B+ to shareholders in the form of share repurchases over the past 2 decades. It has repurchased shares in 15 of the last 19 years at an average price of ~$95.
On January 25, CVX announced that its Board authorized a new $75B share repurchase program with no fixed expiration; the previous authorization was $25B. However, we need to put this authorization in perspective. CVX is not about to repurchase $75B within the next couple of years.
It plans to be a steady buyer of its shares across commodity cycles. With a breakeven Brent price of around $50/barrel to cover CapEx and the dividend and with excess balance sheet capacity, CVX is positioned to return more cash to shareholders in any reasonable oil price scenario. Rather than the Board having to revisit the share repurchase authorization every few years, the repurchase authorization has been set where this matter does not need to be revisited as frequently.
Source: CVX - Q4 and FY2022 Earnings Presentation - January 27, 2023
CVX's diluted weighted average shares outstanding in FY2011 - FY2022 (in millions) are 2,001, 1,965, 1,932, 1,884, 1,875, 1,873, 1,898, 1,914, 1,895, 1,870, 1,920, and 1,940. If we exclude 14 million shares outstanding that are associated with Chevron’s Benefit Plan Trust, there were 1,916 million and 1,901 million outstanding shares at December 31, 2021 and December 31, 2022, respectively.
CVX repurchased ~$11.3B of its shares (almost 4% of its shares) but also issued ~$5.8B for share-based compensation.
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.
At the time of my May 3, 2022 post, shares were trading at ~$160 and the current adjusted earnings estimates and forward adjusted diluted PE valuations were:
- 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.
CVX was trading at ~$154 when I wrote my August 18, 2022 post. Using this share price and the adjusted earnings estimates from the brokers which cover CVX, the forward adjusted diluted PE levels were:
- FY2022: mean of $18.05 and a low/high range of $12.04 – $21.18 from 27 brokers. The forward adjusted diluted PE using the mean estimate is ~8.53.
- FY2023: mean of $16.33 and a low/high range of $8.64 – $25.22 from 27 brokers. The forward adjusted diluted PE using the mean estimate is ~9.43.
- FY2024: mean of $13.61 and a low/high range of $7.38 – $18.90 from 16 brokers. The forward adjusted diluted PE using the mean estimate is ~11.3.
Shares now trade at ~$179.60. Once again, the broker estimates are 'all over the map'. Using the brokers' adjusted earnings estimates, forward adjusted diluted PE valuations are:
- FY2023: mean of $15.96 and a low/high range of $12.53 - $20.94 from 28 brokers. The forward adjusted diluted PE using the mean estimate is ~11.3.
- FY2024: mean of $14.81 and a low/high range of $7.95 - $22.29 from 20 brokers. The forward adjusted diluted PE using the mean estimate is ~12.3.
- FY2025: mean of $12.18 and a low/high range of $9.28 - $13.54 from 7 brokers. The forward adjusted diluted PE using the mean estimate is ~14.7.
The variance in broker estimates is considerable. Furthermore, the swing in estimates at the time of each of my posts is 'eye-opening'. In my opinion, the low range of these estimates is much too low. We have to remember that CVX's breakeven level is when Brent is around $50/barrel; the current Brent crude price is ~$86.52/barrel. There is a wide range of opinions about future Brent levels but I think it will remain well above $50/barrel.
Final Thoughts
In several CVX posts in 2017 - 2021, I suggest that acquiring shares is wise while CVX is out of favour with investors. For example, I conclude my January 12, 2021 Chevron Corporation – Zig When Others Zag post with:
CVX is certainly experiencing headwinds. When a great company falls out of favour, however, I think it is an opportunity to pick up shares that will very likely be far more valuable several years in the future.
While I remain bullish on CVX, I am not currently looking to significantly increase my exposure because it is not out of favour.
I will increase my exposure through the reinvestment of dividends. However, direct purchases will be made in great companies I think are experiencing temporary headwinds and which have fallen out of favour.
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.
