Chevron Is in Good Shape Even if Oil Crashes - Barron's

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Chevron is expected to be able to increase production even though it cut capital spending.

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Chevron held up better than most of its competitors in 2020, because it came into the year focused on keeping its debt in check and reducing its costs. When the pandemic hit, Chevron didn’t face the kind of pressure to cut its dividend that companies like BP and Royal Dutch Shell faced.

That isn’t to say that Chevron (ticker: CVX) didn’t struggle. The company lost $5.5 billion in 2020 and announced thousands of layoffs.

Chevron’s investor day on Tuesday pointed to more-profitable times ahead. Truist analyst Neal Dingmann called it “one of their most investor friendly strategic plans yet.”

In particular, analysts were impressed that Chevron will be able to increase production despite spending much less than it had expected a year ago. “Now, despite a 30% reduction in capital spending, management still expects similar production growth to the pre-Covid outlook from last year’s meeting,” wrote Morgan Stanley analyst Devin McDermott. The plan that Chevron presented should be hold up even at Brent crude prices of $40, he said.

Brent now trades at just under $70.

Among other developments, Chevron said on Tuesday that it can cut operating costs by $600 million after closing its deal for Noble Energy. That is double the amount of savings that the company had anticipated. 

Investors have shown a preference for oil companies that can preserve cash over those that may be growing quickly but are spending heavily. McDermott expects that Chevron can generate $21 billion in free cash flow with Brent at $64, well ahead of Wall Street consensus expectations for $15 billion.

The company’s dividend costs it about $10 billion a year. If its free cash flow can come in at double that level, Chevron could lift the dividend or buy back shares, both of which would likely lift the stock.

Still, Chevron already trades at 25 times this year’s expected earnings and 19 times 2022 earnings. That may be giving some analysts pause. Citi analyst Alastair Syme resumed coverage of the stock on Wednesday, rating Chevron at Neutral because the stock sits at the “higher end” of industry valuations.

Write to Avi Salzman at avi.salzman@barrons.com

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