Chevron (CVX 0.37%) pre-announced its second-quarter earnings on Sunday July 23rd. The results were excellent and featured record-high Permian Basin production of 772,000 barrels of oil equivalent per day (boe/d).
Another major news item was that Chevron will allow CEO Mike Wirth, who turns 63 this year, to remain CEO past the company's mandatory retirement age of 65. Wirth became CEO in February 2018. Meanwhile, CFO Pierre Breber will retire in 2024. Wirth cited his efforts in pursuit of "higher returns and lower carbon" as two reasons why he wants to stay on as CEO.
Under Wirth's tenure, Chevron reduced the debt on its balance sheet, raised its dividend every year, and improved the efficiency of its oil and natural gas businesses while also investing in low-carbon alternatives.
Here are three reasons why Chevron continues to meet and exceed investor expectations, and why the stock is worth buying now.
Image source: Getty Images.
Hitting the mark
In 2019, Chevron set a goal of producing 900,000 boe/d from the Permian Basin by 2024. Given what its operations there now produce, that target seems realistic, which is impressive given how disruptive the COVID-19 pandemic was to Chevron's expansion plans.
In Q2, the Permian provided 63% of Chevron's U.S. production and 26% of its total production. That shift didn't happen overnight -- it took years of fine-tuning the portfolio through selling less profitable assets and doubling down on the Permian through acquisitions and investments.
If we look back to the state of Chevron four years ago in Q2 2019, its overall production was a little higher, at 3.08 million boe/d versus 2.96 million boe/d last quarter. However, its U.S. production was 898,000 boe/d. Just 421,000 boe/d of that came from the Permian, though that was a 50% increase compared to Q2 2018.
In Q2 2023, Chevron's U.S. production was 1.22 million boe/d with, as mentioned, 772,000 boe/d coming from the Permian. In sum, Chevron has made cuts to its international production, and virtually all of its production growth is coming from the Permian.
There are a number of long-term benefits to being in the Permian compared to other plays. Onshore pipelines transport gas from there to Mexico. The region is within striking distance of the Gulf Coast refining and export hub through pipelines across Texas. The Gulf Coast is also home to the largest liquefied natural gas (LNG) terminals in the U.S., which are in Texas and Louisiana. Many new LNG terminals and capacity expansions are underway in the region as well, which will boost natural gas processing and export capacity. The U.S. has become the largest exporter of LNG in the world, moving ahead of Qatar and Australia, and Permian Basin production is critical to supplying that fuel.
Returning value to shareholders
Over the last five years, Chevron has increased its quarterly dividends by 34.8% to $1.51 per share, and has trimmed its net long-term debt position by 71.8% to just $7.4 billion. It has also implemented a massive $75 billion stock buyback program and anticipates an annual buyback rate of $17.5 billion. Chevron's shareholder distributions in Q2 2023 were a record $7.2 billion -- $2.8 billion in dividends and $4.4 billion in share repurchases.
Chevron's strategy is fairly straightforward: Maintain a strong balance sheet to outlast downturns, make acquisitions when the timing is right, and don't over-expand during growth periods. A disciplined policy of buying back stock and raising the dividend acts as a check on the company's investments in growth.
Although you could make the argument that repurchasing shares when the stock price is higher isn't wise, it does provide a lasting impact for shareholders by reducing the outstanding share count and boosting earnings per share. In Chevron's case, its share count rose after it bought Noble Energy in an all-stock transaction, but buybacks have brought the share count back down toward pre-acquisition levels.
Financial discipline
Investors expect Chevron to routinely raise its dividend each year no matter what part of the cycle the energy market is in. To do that, Chevron has to grow its business while not over-expanding during upswings in ways that make it susceptible to financial strains during petro market downturns. That's a fine line to walk, but Chevron has found a strategy that works. The strategy is centered around being conservative, usually far more conservative than its peers.
For example, its energy transition efforts have been meaningful, but far less aggressive than those of the European integrated oil majors. Even its oil and natural gas production has held fairly steady as its Permian Basin growth has been offset by cuts to international production.
Chevron's measured approach is grounded in maintaining a strong balance sheet and not relying on debt. The company has a negligible amount of debt on its balance sheet considering how big it is. For context, Chevron's net total long-term debt is about 42% of BP's, even though Chevron's market cap is nearly triple that of BP. Chevron is nearly 50% larger than Shell, but has just 17% of its total net long-term debt.
Shell and BP have been far more aggressive with their renewable energy investments. Those gambles could pay off for them over time. But Chevron is going to approach the green energy transition at its own pace.
A reliable dividend stock you can buy and hold forever
Chevron's ability to deliver on promises is due to its predictability. With Chevron, investors know what they are getting. It's not going to blow expectations out of the water, but it is going to be extremely reliable and disciplined, which matters a lot when the stock market is falling or the oil and natural gas industry is in a downturn.
For this reason, Chevron serves as a low-risk way to invest in the energy sector which also generates a steady stream of passive income.
