Chevron(NYSE: CVX) has an elite record of growing its dividend. The oil giant delivered its 37 consecutive dividend increase earlier this year, the second-longest current streak in the oil patch. The company has grown its payout twice as fast as its closest peer over the last several years, including by 8% earlier this year.
One of the secrets of its success is that Chevron focuses on returns over growth, which means it doesn't chase the hottest areas in the oil patch. Instead, it will invest capital where it can earn attractive returns. One overlooked spot where it's investing these days is the U.S. Gulf of Mexico. That strategy could pay big dividends in the coming years.
An underappreciated asset
Chevron has a globally diversified portfolio of upstream, midstream, and downstream assets, referring, respectively, to production, pipelines, and chemicals and refining. That business model enables Chevron to maximize the value of every molecule of hydrocarbons it produces. The company also focuses on maximizing its returns by investing in areas where it produces low-cost and, ideally, lower carbon-intensity oil and gas.
The U.S. Gulf of Mexico is one of those locations. The company's operations produce some of the world's lowest carbon-intensity oil and gas. Furthermore, it can generate attractive returns by investing in growing its output from the region.
Chevron recently started water injection operations at two projects to boost its oil and gas recovery at its existing Jack/St. Malo and Tahiti facilities in the deepwater Gulf of Mexico. The company noted that these projects will maximize the returns of its existing resource base. They'll also put the company another step closer to its goal of growing its production in the region to 300,000 net barrels of oil equivalent per day (BOE/d) by 2026.
Those are just some of the many projects Chevron has under way in the region. It's close to delivering first oil for its Anchor development, which came in under budget even as it deployed multiple breakthrough technologies. Those projects position Chevron to deliver high cash margins and low carbon-intensity production growth.
Chevron has more growth potential in the region. It's one of the largest leaseholders in the basin. It also has leading technology capabilities and attractive exploration opportunities near existing infrastructure and in frontier areas. These factors put Chevron in a strong position to continue growing its production in the region.
A potential booster
Chevron is quietly looking to bolster its position in the Gulf of Mexico. The company agreed to acquire Hess(NYSE: HES)last year in a nearly $60 billion deal. The main driver is the company's position in the oil-rich Stabroek block offshore Guyana. Hess also has a position in the Bakken region, which would boost Chevron's U.S. onshore resource position. In addition, it operates in the U.S. Gulf of Mexico and Southeast Asia.
The focus of that deal has been on Guyana, and rightfully so, since that world-class resource position would really move the needle for Chevron. However, with all eyes on Guyana, most investors have overlooked that Hess also operates in the U.S. Gulf of Mexico, producing about 30,000 BOE/d. It's a highly complementary position to Chevron's existing assets in the region, meaning Chevron could invest in capital-efficient development projects to increase its production. That would enhance its returns from this low-cost and lower carbon-intensity region. They add to the overall exceptional strategic fit of the Hess acquisition.
One of many growth drivers
Chevron expects to grow its free cash flow by about 10% annually over the next several years, thanks partly to under-the-radar assets such as its position in the Gulf of Mexico. Meanwhile, adding Hess, which would bulk up its already strong position in the region while adding other growth drivers, would help accelerate its growth. It could more than double the company's free cash flow by 2027. They combine to make Chevron a compelling dividend growth stock. The oil giant should have plenty of fuel to maintain its magnificent streak of increasing its dividend for years to come.
Where to invest $1,000 right now
When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 721% — a market-crushing outperformance compared to 162% for the S&P 500.*
They just revealed what they believe are the 10 best stocks for investors to buy right now…
*Stock Advisor returns as of September 3, 2024
Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
