Crude prices will likely remain volatile for all of 2019. The best way to cut your oil price risk is with integrated producers because refineries achieve higher profit margins when they pay less for the crude oil they use as raw material.
This particular integrated producer should generate cash flow of around $30 billion and it’s increased its dividend by an average of 3.5% annually over the last 5 years.
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CHEVRON CORP., (New York symbol CVX; www.chevron.com) is the second-largest integrated oil company in the U.S. by revenue, after ExxonMobil (New York symbol XOM).
Producing oil and natural gas supplied 78% of Chevron’s earnings in 2018. Based on its current production rates, the company’s reserves of 12.1 billion barrels should last roughly 12 years.
The other 22% of Chevron’s earnings comes from refineries, petrochemical operations and 7,700 gas stations in the U.S. Those refuelling stations operate under the Chevron and Texaco banners.
Due to declining production and lower oil and gas prices, Chevron’s revenue fell 46.0%, from $212.0 billion in 2014 to $114.5 billion in 2016. As oil prices improved, the company’s revenue rebounded 28.8% to $141.7 billion in 2017. Revenue then rose 17.4% to $166.3 billion in 2018.
Earnings fell 75.8%, from $10.14 a share (or a total of $19.2 billion) to $2.45 a share (or $4.6 billion) in 2015. The company lost $0.27 a share (or $497 million) in 2016. Earnings then recovered to $3.79 a share (or $7.2 billion) in 2017, and reached $7.74 a share (or $14.8 billion) in 2018.
Cash flow per share dropped 47.7%, from $10.14 in 2014 to $10.02 in 2016, but rebounded to $13.93 in 2017 and to $16.37 in 2018.
Chevron’s production rose 7.4%, to 2.93 million barrels a day (61% oil, 39% gas) in 2018 from 2017.
The company continues to ramp up two big offshore LNG (liquefied natural gas) projects on Australia’s northwest coast. Chevron owns 47.3% of the first project, called Gorgon, and operates it. Gorgon’s reserves should last 40 years. The company also owns 64.14% of the nearby Wheatstone project, with reserves that should last 30 years.
In all, Chevron spent roughly $44 billion to develop those projects. Long-term contracts cover about 80% of their total output. That cuts their risk.
Now that the company has completed work on the Australian LNG operations, it’s turning its focus to new growth projects. Those include expanding the Tengiz oil field in Kazakhstan by 35%; Chevron owns 50% of this field, while the government of Kazakhstan owns the other 50%. The company expects to complete this project by 2022.
Another big growth area for Chevron is the Permian shale oil and gas basin in west Texas and New Mexico. In the fourth quarter of 2018, those operations produced 377,000 barrels a day, up 84% from the year-earlier quarter. The company aims to increase its Permian output to 650,000 barrels a day by the end of 2022.
Overall spending on exploration and upgrades rose 6.8%, from $18.8 billion in 2017 to $20.1 billion in 2018. For 2019, capital spending will likely fall slightly to around $20 billion. Even so, Chevron expects its production will rise between 4% and 7% in 2019.
The company also continues to expand its refining operations. It recently agreed to buy a refinery in Pasadena, Texas (near Houston) from Brazilian oil giant Petrobras for $350 million. The deal includes storage terminals and connecting pipelines. The company expects to complete the purchase by June 30, 2019.
The new facility will increase Chevron’s U.S. refining capacity by 12% and help it process rising production from its Permian properties. As well, processing that oil closer to where it was produced should lower costs.
To help pay for these investments, the company will sell its less-important assets such as its operations in Azerbaijan. They consist of a 9.75% stake in the Azeri-Chirag-Gunashli offshore field in the Caspian Sea and a 8.9% interest in the Baku-Tbilisi-Ceyhan pipeline. Baku pumps crude oil from the Caspian Sea to the Mediterranean. The company also plans to sell its offshore operations in the North Sea.
In 2018, Chevron raised $2 billion through asset sales. It aims to increase that total to between $5 billion and $10 billion by the end of 2020.
However, U.S. sanctions could force the company to abandon its operations in Venezuela. Those include a 30% stake in that country’s second-largest heavy oil upgrader; the state-owned oil company owns the other 70%.
Chevron’s solid balance sheet will help it absorb the loss of the Venezuelan operations and let it keep investing in its new projects. As of December 31, 2018, its total debt was $34.5 billion, or a moderate 15% of the company’s market cap. Chevron also held cash of $9.3 billion.
Meanwhile the company raised its quarterly dividend by 6.2% with the March 2019 payment. Investors now receive $1.19 a share, up from $1.12. Chevron’s new annual rate of $4.76 yields a high 3.8%. The company has now increased its dividend each year for the past 32 years.
The company can comfortably afford those outlays. For 2019, it expects to generate cash flow of around $30 billion. That leaves it plenty of room for its plan to buy back $1 billion of its shares this year.
Chevron has now increased its dividend by an average of 3.5% annually over the last 5 years.
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