Chevron(NYSE: CVX) is a cash-generating machine. The oil company's integrated operations produce a lot of cash each quarter, giving it money to invest in growing its business and return cash to shareholders.
The company's cash returns hit a record $7.7 billion in the third quarter, fueled by its growing dividend and a record amount of share repurchases.Chevron has put itself in a strong position to continue returning a lot of cash to its investors in the future.
Gushing cash returns
Chevron produced $9.7 billion in cash flow from operations during the third quarter, bringing its year-to-date total to $22.8 billion. Its third-quarter tally was roughly flat compared with the year-ago period despite lower oil prices during the third quarter. Chevron offset the impact of lower oil prices by growing its production by 7%, thanks to record production in the Permian and the impact of its PDC Energy acquisition, and by receiving higher dividends from an equity affiliate.
The oil giant reinvested $4.1 billion into maintaining and growing its operations during this period. Chevron is investing heavily in its advantaged resource portfolio to grow its higher-margin output in places like the Gulf of Mexico, Permian Basin, and Kazakhstan.
Chevron also returned a record $7.7 billion in cash to its shareholders during the quarter. It paid $2.9 billion in dividends. While that was flat with the year-ago period, it has increased its per-share payment by 8% this year, its 37th consecutive year of raising the dividend. Chevron also repurchased a record $4.7 billion of shares, up from $3.4 billion in the year-ago period. The company has now paid $8.9 billion in dividends this year, $400 million higher than the same period of 2023, and repurchased $10.7 billion of its stock, $800 million less than its 2023 year-to-date pace.
The company was able to deliver the record quarterly cash returns thanks to its elite balance sheet. It used its balance sheet capacity to borrow money to cover the difference between its free cash flow and cash returns. Even with that debt issuance, CEO Michael Wirth noted on the third-quarter earnings conference call, "We've got AA credit and below 12% net debt." Its leverage ratio is currently well under its 20% to 25% target range.
Priming the pump to return more cash
Chevron is positioning its business to continue returning significant cash to its shareholders in the future. It's investing heavily to grow the production of its highest-margin assets. For example, It started up three projects in the Gulf of Mexico during the third quarter and has more project start-ups coming online through 2025. These projects will boost its production in that region by 300,000 barrels of oil equivalent per day (BOE/d) by 2026. In addition, it has projects under way in the Permian, Kazakhstan, and elsewhere to increase its production from high-margin assets in the coming years.
These investments should help grow Chevron's production by more than 3% annually through 2027. Meanwhile, the focus on investing in higher-margin assets should help fuel more than 10% annual free cash flow growth during that period from 2022's level, assuming $60 oil.
On top of that, Chevron recently unveiled a plan to "deliver $2 billion to $3 billion in structural cost reductions by the end of 2026," stated CFO Eimear Bonner on the third-quarter call. The CFO noted, "These cost savings will largely come from optimizing the portfolio, leveraging technology to enhance productivity, and changing how and where work is performed, including the expanded use of global capability centers."
Finally, Chevron is working to high-grade its portfolio to enhance its ability to generate cash in the future. It has agreed to sell assets in Canada, Alaska, and the Congo, which will generate about $8 billion in before-tax proceeds when they close in the current quarter. Those sales are part of the $10 billion to $15 billion of divestitures it expects to complete through 2028. They will help bolster its already elite balance sheet, giving it additional financial flexibility. On top of that, Chevron is working to close its needle-moving acquisition of Hess, which would more than double its free cash flow by 2027, assuming $70 oil.
These factors fuel Chevron's view that it can continue increasing its dividend and buy back stock. It's targeting to repurchase $10 billion to $20 billion of shares each year. It can achieve the low end at an average oil price of $50 a barrel through 2027, thanks to its elite balance sheet. Meanwhile, the high end is likely at an oil price above $70 a barrel.
The fuel to continue returning cash to shareholders
Chevron returned a record amount of cash to its shareholders last quarter. It could return even more money to investors in the future, given the initiatives it's taking to grow its highest-margin assets, reduce costs, and optimize its portfolio. These factors could give Chevron the fuel to produce robust total returns in the future, making it a compelling long-term investment.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $22,050!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $41,999!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $407,440!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of November 4, 2024
Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
