Justin Sullivan
chevron (New York Stock Exchange: CVX) recently reported fourth quarter 2022 earnings. This has reduced stock trading by about 4%. Investors were somewhat disappointed with the results, but the company remains a strong cash generator, We have a strong asset portfolio. This article analyzes the company’s latest earnings results, examines the potential risks associated with the stock, and assesses its current valuation to give readers a more comprehensive understanding of the stock and its potential future performance. will do so.
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 own financial needs and constraints before purchasing any stock.
Earnings in Q4 2022
CVX reported fourth-quarter 2022 EPS of $4.09, below consensus expectations of $4.32.upstream of the company Earnings declined approximately 25% sequentially and increased 43% year-over-year to $6.64 billion. This is due to the quarterly decline in commodity prices, which puts him 3% below consensus. Total exploration and production (E&P) production was broadly in line with expectations at about 3.01 million barrels of oil equivalent per day (MMBoed).
Downstream segment revenues of approximately $1.88 billion were 7% below consensus, down 20% quarter-over-quarter on lower refining and marketing (R&M) margins, partially offset by higher volumes. was canceled out by However, downstream revenue increased 148% year-on-year. Operating cash flow before working capital changes was approximately $11.5 billion, 7% below consensus.
Highlights of the week
Dividend increase: Earlier this week, before the earnings call, CVX increased its quarterly base dividend by about 6% to $1.51 per share. This beats consensus expectations and suggests an annual rate of 3.4%. The development was well received by investors, as many of them own CVX’s dividend yield.
The buyback failed to live up to bullish expectations: CVX plans to raise $3.75 billion in the first quarter of 2023 and has announced that it will continue to repurchase its shares capped at a target of $5 billion to $15 billion annually. The market had expected a more aggressive pace given the $75 billion buyback approvals announced earlier this week and net debt nearing zero. The company has said its share buybacks are repeatable and sustainable throughout the product cycle, and at this pace, even in a lower oil and gas price environment, the company expects share buybacks to grow by more than 30% year-over-year in 2023. is expected to increase its share buybacks. That sets it apart from other U.S. upstream companies, and investors are expected to accelerate the pace of share buybacks again this year.
Production guide: CVX also led upstream production in 2023 to be 0% to 3% year-on-year, in line with consensus estimates. However, management comments the FY22 reserve replacement had a 97% chance of disappointing investors.
Implicit evaluation is competitive: Combined with the share buyback, the company is offering a total cash return yield of about 8% this year at current strip prices competitive with Exxon and other US E&P peers. CVX’s total cash return yield is also well above the S&P 500’s estimated 4.5%.
financial strength
Chevron has a strong reputation for effective capital management and solid financial position. Unexpected global shutdowns due to the pandemic and falling oil prices prompted investors to seek safety from Chevron. The company emerged stronger from these challenges.
The company exited in 2022 with $17.7 billion in cash and cash equivalents and $21.1 billion in long-term debt. Our calculations show that the company’s net debt-to-equity ratio is just 3.3%. Using the company’s capital allocation plans, projected production volumes, and strip prices, the company believes it is on its way to a net cash position of about 3% of its capital by the end of 2023.
It took decades, but the oil and gas industry and its investors came to a mutual understanding that it was unwise to escalate investment in upstream production when market conditions were favorable. Given this newfound financial prudence, we expect Chevron’s solid financial position to drive further industry consolidation, along with sustained growth in both dividend payments and share buybacks.
risk
While some market participants may be concerned about Chevron’s underperforming earnings per share in the fourth quarter and insufficient growth in its share repurchase program, these could be significant for long-term investors. I don’t see it as a risk. In our assessment, the most significant risk to holding the stock and our investment theory is the potential abandonment of financial discipline in upstream production and acquisition activities.
An industry proverb says, “Give a man a drill and he will dig a hole; give the oilman a dollar and he will dig a well.” It is a humorous expression that emphasizes the entrepreneurial spirit and determination of the oil industry to extract and produce oil whenever the opportunity presents itself.
In difficult times, the oil and gas industry and its investors tend to recognize the importance of financial discipline. However, during good economic times like now, smaller companies may be willing to take risks to increase their market share, resulting in companies such as Chevron and Exxon Mobil (XOM). pressure on other large companies to adopt similar strategies or compete in a bidding war. to acquire these high-growth companies. A high return on investment as a result of financial discipline may also encourage new entrants to the oil and gas industry. Despite optimism that the industry has matured and adopted a more rational approach, history suggests that management’s actions need to be closely monitored, so caution is warranted.
Conclusion
Long-term investors should be careful when interpreting quarterly results. We monitor earnings closely each quarter, and our overall assessment for this quarter is that Chevron management continues to be committed to financial prudence. Investors need to be vigilant and hold management accountable for maintaining this prudent approach. Favorable market conditions should avoid the temptation to seek market share through excessive capital expenditures or acquisitions.
