Back to top

Image: Bigstock

Chevron (CVX) Banks on Permian, Prioritizes Cash Flow Growth

Read MoreHide Full Article

Chevron Corporation (CVX - Free Report) recently issued a statement at its latest annual analyst day, highlighting its production plans and aggressive drilling strategies in the prolific Permian play. The California-based supermajor also laid emphasis on its prudent capital expenditure program, strengthening of financials and cash flow generation.

Stepped-Up Output, Emphasis on Permian Production

As we know, Chevron is the largest oil and gas producer in the United States, and is poised for production growth from shale/tight oil assets, deepwater Gulf of Mexico portfolio, alongside solid execution of major projects including Australian LNG projects (Gorgon and Wheatstone). Notably, the company recorded production of 2,930 thousand oil-equivalent barrels per day (MBOE/d), up 7.4% from 2017 levels.

The energy giant expects compounded annual output growth rate of 3-4% through 2023, with major contribution from the Permian Basin. Since 2017, Chevron has doubled its portfolio value in the Permian, with its current acreage standing at 2.2 million total net acres. It has also lifted its reserve estimates in Permian from 9 billion barrels of oil equivalent to 16.2 billion barrels of recoverable resources. Chevron now expects Permian production to reach 600,000 barrels per day (Bpd) by the end of the decade and 900,000 Bpd within 2023-end. This indicates a 40% increase from its previous growth plan. On a further encouraging note, Chevron has managed to cut down development and production costs in the Permian by 40% since 2015, and expects to be cash flow positive in the region within 2020.

Ambitious Capital Outlay to Support Output Growth

Chevron plans to spend $19-$22 billion per annum from 2021 to 2023, in order to support its ambitious production plans. Notably, the company projects 2019 capex to be $20 billion, higher than the 2018 level. In fact, Chevron upwardly revised its capex for the first time over the last four years. With bulk of 2019 spending directed toward the upstream segment, the company is poised for significant output growth and cash flow generation. This year, Chevron intends to spend $3.6 billion in the Permian play and another $1.6 billion in other shale plays like Marcellus, Duvernay and Vaca Muerta.

Cash Flow Generation & Investor-Friendly Moves Remain Top Priorities

Chevron expects its cash flow to improve significantly on the back of cost reduction, while exiting unprofitable markets and streamlining the organization. The company expects cash generation of about $30 billion at $60 a barrel in 2019. Emphasizing on strengthening of its balance sheet, the company believes that free cash flow momentum will continue in the coming years as well.

Dividend growth remains one of the top priorities for management. As we know, the diversified oil company has a long and consistent dividend-paying track record. The dividend aristocrat has managed to maintain its dividend growth streak for 32 consecutive years now. On the back of solid execution and cash flow generation, the company remains committed to return value to its shareholders. Banking on increasing free cash generation through production growth and cost cuts, the Zacks Rank #3 (Hold) company forecasts a 6% annual dividend hike along with $4-billion worth of share buyback programs. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Oil Supermajors Bet Big on Permian

Not just Chevron, its rival Exxon Mobil Corporation (XOM - Free Report) also lifted its projection of Permian output recently. ExxonMobil has upwardly revised its production estimates from 600,000 barrels of oil equivalent per day (Boe/d) to more than 1 million Boe/d by 2024. ExxonMobil plans to increase its active drilling rigs in the Permian from 48 to 55 by the end of this year.

The revised output expectations from both the oil biggies underscore their confidence in the Permian region, which is the heartland of the U.S. shale boom. The advent of technologies like horizontal drilling and hydraulic fracturing are primarily aiding Permian to witness increasing output growth. Markedly, despite the pipeline pinch in the region, Permian output is still growing.

Higher output projections from the two oil biggies mark the growing shift in the dynamics of the shale industry, which was mainly spearheaded by mid-cap or small-cap energy players but is now getting increasingly influenced by energy supermajors. While oil majors like ExxonMobil, Chevron, Royal Dutch Shell plc (RDS.A - Free Report) and BP plc (BP - Free Report) earlier accounted for a cumulative 9% of the Permian output five years back, the combined market share of these biggies in Permian has now increased around 16%.

As the ‘mom and pop’ shale players are curtailing their spending amid takeaway woes, large-cap companies are scaling up and progressing on the path of aggressive output growth in the region. Notably, Chevron recorded Permian output of 377,000 Bpd in the last reported quarter, significantly up 93% from 205,000 Bpd in fourth-quarter 2017. With both Chevron and ExxonMobil boasting top-tier acreage positions in Permian, the companies plan to more than double their production levels in the region over the next five years or so. While ExxonMobil is ramping up infrastructure spending in the shale play to reduce infrastructure bottlenecks, Chevron recently entered into a deal with Petrobras to buy Pasadena Refining System to process its growing Permian output.

Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.

This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.

See their latest picks free >>