Chevron: Q4 Earnings Disappoints, Offset By Cash Returns (NYSE:CVX)

Chevron (NYSE:CVX), a leading energy company, recently reported its 4Q22 earnings, which led to a decrease in the stock’s trading by approximately 4%. Although investors were somewhat disappointed with the results, the company remains a strong generator of cash and has a robust portfolio of assets. In this article, we will analyze the company’s latest earnings results, examine the potential risks associated with the stock, and evaluate its current valuation to provide readers with a more comprehensive understanding of the stock and its potential performance moving forward.

Note: This article is for educational purposes only and does not constitute financial or investment advice. Please do your own due diligence and consider your unique financial needs and constraints before buying any stock.

Q4 2022 Earnings

CVX reported 4Q22 EPS of $4.09, which falls below the consensus estimate of $4.32. The company’s upstream earnings fell by approximately 25% sequentially and increased by 43% year-over-year to $6.64 billion, driven by lower quarterly commodity pricing and is 3% below consensus. The total exploration and production (E&P) production volumes were around 3.01 million barrels of oil equivalent per day (MMBoed), which were generally in line with expectations.

The downstream segment earnings came in at around $1.88 billion, which is 7% below consensus and a decrease of 20% quarter-over-quarter due to lower refining and marketing (R&M) margins, partially offset by higher volumes. However, downstream earnings were up 148% year-over-year. Cash flow from operations before working capital changes was approximately $11.5 billion, which is 7% below consensus.

Key Takeaways This Week

Dividend Increase: Earlier this week, before its earnings release, CVX raised its quarterly base dividend by approximately 6% to $1.51 per share, above consensus expectations and implying a 3.4% annualized yield. Since many investors own CVX for its dividend yield, this development was received favorably by investors.

Buyback Didn’t Meet Bullish Expectations: CVX announced that it will continue buying back stock at the top end of its $5-$15 billion per annum target, with $3.75 billion planned for 1Q23. The market had expected an even more aggressive pace, given the $75 billion repurchase authorization announced earlier this week, and with net debt approaching zero. The company stated that the buyback is sized to be repeatable and sustainable through commodity cycles, and at this pace, it would be increasing buybacks by more than 30% year-over-year in 2023, even in a lower oil and gas price environment. This sets it apart from other US upstream peers, and investors are expected to continue pushing for an increase in the pace of buybacks this year.

Production Guidance: CVX also guided 2023 upstream production to be between 0% and 3% year-over-year, in line with consensus estimates. However, management’s comment FY22 reserve replacement was 97% likely disappointed investors.

Implied Valuation is Competitive: Combined with share buybacks, the company is offering a total cash return yield of around 8% this year at current strip prices, which is competitive with Exxon and other US E&P peers. CVX’s total cash return yield is also far superior to the S&P 500’s estimated 4.5%.

Financial Strength

Chevron has a deserved reputation for effective capital management and a solid financial position. Due to the pandemic’s unexpected global shutdowns and oil price drops, investors sought safety in Chevron. The company emerged from these challenges stronger.

The company ended 2022 with $17.7 billion of cash and cash equivalents and long-term debt of $21.1 billion. We calculated that the company’s net debt to capitalization ratio is only 3.3%. Using the company’s capital allocation plans, forecasted production volumes and strip prices, we believe the company is headed to a net cash position by the end of 2023 of ~3% of capitalization.

It has taken several decades, but the oil and gas industry, as well as its investors, have come to a mutual understanding that it is imprudent to escalate investment in upstream production when market conditions are favorable. Given this newfound financial prudence, we anticipate that Chevron’s robust financial position will facilitate further industry consolidation, along with sustained growth in both dividend payouts and share repurchases.

Risks

While some market participants may be concerned with Chevron’s fourth quarter earnings per share shortfall and the insufficient growth in its share buyback program, we do not consider these to be substantial risks for long-term investors. In our assessment, the most significant risk to holding the stock and our investment thesis is the potential abandonment of financial discipline in upstream production and acquisition activities.

The saying in the industry, “Give a man a drill and he will drill a hole, give an oil man a dollar and he will drill a well.” It is a humorous expression that highlights the entrepreneurial spirit and determination of the oil industry to extract and produce oil whenever the opportunity arises.

During difficult times, the oil and gas industry and its investors tend to acknowledge the significance of financial discipline. However, during good times such as now, smaller firms may be more willing to take risks to increase market share, which could result in increased pressure for major companies such as Chevron and Exxon Mobil (XOM) to adopt similar strategies or compete in bidding wars to acquire these high-growth companies. High return on investments as the results of financial discipline could also encourage new entrants into the oil & gas industry. Despite optimism that the industry has matured and adopted a more rational approach, caution is advised as history suggests a need for vigilant oversight of management actions.

Conclusion

For long-term investors, it’s important to exercise caution when interpreting quarterly financial results. Although we closely monitor earnings on a quarterly basis, our overall assessment of the quarter is that Chevron’s management remains committed to financial prudence, as evidenced by their measured increase in dividends and share repurchases and the ongoing improvement of their financial position. Investors should be vigilant and hold management accountable for maintaining this prudent approach, avoiding the temptation to pursue market share through excessive capital expenditures and acquisitions during favorable market conditions.