Integrated oil major Chevron (CVX - Free Report) reported both quarterly and full-year results on Friday. The company notched up a slender earnings beat in the fourth quarter of 2019 driven by strong production from the Permian Basin.
Despite the outperformance, Chevron shares lost almost 4% on that day as the San Ramon, CA-based firm’s weak reserve replacement ratio and downstream weakness left investors feeling jittery. The broad energy market negativity and the sharp decline in oil prices on fears that the coronavirus outbreak in China would have a severe impact on the commodity’s demand, also took its toll.
While it is true Chevron recorded weak performance across most business lines relative to the past year, it’s true for all the supermajors. Moreover, larger rivals ExxonMobil (XOM - Free Report) and Royal Dutch Shell (RDS.A - Free Report) both reported profits that fell short of the respective Zacks Consensus Estimates.
Chevron's share price hit a new 52-week low of $105.40 during the trading session on Feb 3. The stock now trades at $110.28 (as of Feb 6, 2020), only a few dollars over its lowest point in a year. The current Zacks Consensus Estimate for 2020 is a profit of $7.07 per share. This puts Chevron at 15.6X forward earnings. This is a large discount to its 5-year median earnings multiple of 23.34X. In other words, the recent sell-off presents investors an opportunity to buy Chevron shares at a bargain price.
Not surprisingly, the stock is still a huge draw among investors and is currently sporting a Zacks Rank #2 (Buy). We take a closer look at the results to gain further insight. Here are some key things you need to know from Chevron's earnings update.
It operates in two segments: Upstream and Downstream. Confirming its integrated structure, the company generated 51% of its 2019 earnings from its upstream unit and 49% from its downstream unit. Chevron currently produces oil and natural gas at a 61/39 ratio.
Profit Sinks, as Upstream Earnings Plunge: Chevron suffered a massive decline in its full-year EPS, from $7.74 to $1.54. In particular, the company reported $2.6 billion of earnings from its upstream business, compared with $13.3 billion in the previous year. The steep dive was on account of lower oil and gas prices, plus one-time items. In the fourth quarter, the company took a $10 billion hit from non-cash impairment charges on certain oil and gas assets.
Moreover, Chevron’s downstream operation earnings decreased from $3.8 billion in 2018 to $2.5 billion in 2019, largely due to weak margins.
Impressive Production Growth, Led by Permian: Meanwhile, Chevron’s worldwide production averaged a record 3,058 MBOE/d in 2019, reflecting an increase of 4.4% from 2,930 MBOE/d a year ago. In addition, the company expects to grow its output by 3% this year and at a 3-4% CAGR from 2018 until 2023.
This production growth will primarily come from Chevron’s showpiece Permian Basin assets, where it has substantial holdings of 2.2 million net acres. The company realized production increase of 154 MBOE/d in 2019 with Chevron targeting output of 900,000 barrels per day in 2023. During the fourth quarter, volumes from the world’s hottest shale play jumped by 36% to 514 MBOE/d.
Chevron’s well economics in the Permian also continues to show improvement as the company has been able to achieve a 40% reduction in its development and production costs since 2015. Thanks to its successful cost control initiatives, the company has lowered its break-even price for oil to an industry-leading $51 per barrel.
Maintains Dividend Streak: Chevron maintained its dividend growth streak, marking the 33rd consecutive year of payout hike. The company hiked its dividend by 10 cents per share, giving investors a reason to cheer. Chevron declared a dividend of $1.29 per share, payable on Mar 10 to its shareholders as of Feb 18.
Apart from Chevron, European majors BP plc (BP - Free Report) and TOTAL S.A. (TOT - Free Report) also raised their payouts
Lower Free Cash Flow but Dividend Safety Intact: Chevron’s free cash flow has gone down last year. In 2019, the company generated $27.3 billion of cash from operating activities ($30.6 billion in 2018) while shelling out $14.1 billion on capital expenditures ($13.8 billion in 2018) for free cash flow of $13.2 billion (a record $16.8 billion in 2018). During the same period, Chevron paid out $9 billion as cash dividends to its shareholders. In other words, despite the lower free cash flow, the company’s dividend appears safe for the foreseeable future.
Using $5.16 as the dividends to be received in the next 12 months (after taking into consideration the recent hike) and based on 1.9 billion diluted shares outstanding, the total payout comes to nearly $10 billion annually, lower than the free cash flow.
Debt Down: Chevron's total debt is currently $27 billion, down from $34.5 billion a year ago. Importantly, the company's year-end debt ratio was 16%, improving from 18% at year-end 2018.
Reserve Replacement Weakens: Over the past few years, oil and gas supermajors have struggled to replace reserves as new energy resources become less accessible. Given their large asset bases, achieving growth in the production of oil and natural gas has been a challenge for many years. In this context, Chevron's 2019 oil reserve replacement ratio (RRR) of just 44% is indicative of the company's inability to add proved reserves to its reserve base to the amount of oil and gas produced.
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