When Chevron (CVX +0.28%) reported fourth-quarter 2020 earnings, CEO Mike Wirth described it as "an unprecedented year." That's an understatement, given that oil prices actually fell below zero at one point. But the oil giant muddled through, and is strongly positioned to benefit as oil prices rebound. Here are some key points to consider if you are looking at this integrated energy giant with a fat 5.8% dividend yield.
1. Financially strong
The one place where Chevron shines particularly bright is its balance sheet. Although the company has yet to file its annual report, it ended the third quarter with a debt to equity ratio of roughly 0.26 times, the lowest of its peer group. The closest competitor was ExxonMobil (XOM 0.77%), with a ratio of 0.39 times. The key here, however, is that the two companies actually traded places: Historically Exxon had the better debt to equity ratio, but the 2020 energy industry downturn changed that in a big way because of the company's heavy capital spending plans.
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To be fair, neither company is in a bad position financially speaking, but Chevron simply has more leeway to lean on its balance sheet if times remain tough. That's a huge advantage for many reasons: The company is able to continue supporting its dividend and capital spending plans, even while taking advantage of external opportunities.
2. Leaning in
That brings us to the second point: Chevron used the downturn to buy Noble Drilling. The total deal value was roughly $13 billion, including around $8 billion worth of debt. Chevron's balance sheet strength was what allowed it to take on a deal like this during an industry downturn. But the real key here is that the oil giant was able to opportunistically use the "unprecedented" downturn to strengthen its long-term position in the industry.
However, there's another important factor here as well. At the end of 2019 Chevron was looking to buy Anadarko Petroleum, but was outbid by Occidental Petroleum. Chevron walked away when it thought the price got too high. The deal turned out to be poorly timed for Occidental, but was evidence of Chevron's disciplined approach, since it chose not to get into a bidding war. In other words, investors should be pretty confident that Chevron didn't overreach with Noble.
3. Modest spending
In addition to these facts, Chevron was able to pull back hard on its capital spending plans in 2020. The final tally was 35% below the 2019 figure. But the roughly $13 billion the energy company spent was also below the company's pandemic-revised projections of $14 billion. So the company was able to quickly adjust to the industry upheaval. For comparison, Exxon spent $21 billion.
Despite the pullback in spending, Chevron's production rose 1% in 2020, helped by the purchase of Noble. Meanwhile, Exxon's production fell by nearly 5%. So despite the industry headwinds and reduced spending, Chevron is finding a way to keep growing its business, while its closest peer balance sheet-wise is just trying to muddle through.
4. Still a rough market
All of this good news, however, has to be juxtaposed against the most obvious negative. Although oil prices have been heading higher in early 2021, times are not back to normal by any stretch of the imagination. To put some numbers on that, in the fourth quarter of 2020 Chevron reported an adjusted loss of a penny a share, and for the full year the adjusted loss was $0.20 per share. But if you include one-time items, like the $4.5 billion write down the company took, the full-year loss was a painful $2.96 per share. Chevron took a larger one-time charge of $8.7 billion in 2019, but higher oil prices more than offset that hit, with the company earning $1.54 per share.
The higher oil prices we've seen so far in 2021 will help to get earnings moving on a better path, but Chevron reports that its break-even point is $55 per barrel. That's a low number relative to those of peers, but it means that Chevron really needs oil to stay in the current range (it recently surpassed $60 per barrel) or 2021 will be another difficult year. The problem is that the course of the global pandemic is unknowable. So for now it looks like oil inventories are heading lower and demand is slowly returning -- but that these dynamics could easily change for the negative based on new variants of the novel illness.
A worthwhile choice, for an oil company
When you step back and look at the big picture here, Chevron is probably the best positioned oil company today given its strong financial position, relatively low spending needs, and its ability to take advantage of downturn to bolster its industry position. Given the uncertainty that still exists, investors looking at the energy sector should like what they see here. And while you wait for an industry rebound, you can collect a generous 5.8% dividend yield backed by more than 30 years of annual dividend increases.
