Chevron (CVX -0.11%) made two major announcements on Sunday, July 23rd. The first was a pre-release of second-quarter results, which included strong production numbers and profits.
The second news was an exception to the mandatory retirement age of 65 for CEO Mike Wirth, who will be 63 later this year -- implying that he will be CEO for at least another two years.
Wirth has been in that job since February 2018. And in that time, he and his team faced a number of challenges, during which he steered Chevron in the right direction when so many of its peers were making mistakes.
Let's look back at some of these decisions to illustrate the importance of good management, why it's crucial to a sound investment thesis, and why Chevron stock is worth buying now.
Passing on Anadarko Petroleum
In 2019, the oil and gas industry was doing well. Operators were aggressively targeting the Permian Basin in western Texas and eastern New Mexico. The region is famous for its low production costs. Infrastructure improvements, including increased takeaway capacity from pipelines, made the Permian a coveted exploration area.
Earlier that year, ExxonMobil (XOM 0.26%) and Chevron made massive commitments to boost their Permian production. Exxon said it wanted to produce 1 million barrels per day (bpd) from the Permian by 2024, and Chevron made a target of 900,000 bpd by 2025.
So it wasn't all that surprising when Chevron made a bid to buy Permian exploration and production (E&P) company Anadarko Petroleum for $65 per share later that year. However, Occidental Petroleum (OXY 0.52%), another E&P, outbid Chevron, offering $76 per share, or 17% more than Chevron's bid.
Chevron was already paying a premium based on Anadarko's market value. Instead of getting into a bidding war with Occidental, it decided to walk away and received a $1 billion breakup fee in the process.
The no-deal decision and the free $1 billion proved brilliant and lucky, as less than one year later the oil and gas market would plummet as a result of the pandemic. Occidental stock proceeded to fall from over $60 a share at the time of the Anadarko acquisition announcement, to below $10 by fall 2020.
Buying Noble Energy
Passing on Anadarko freed up dry powder and reduced strain on the balance sheet, allowing Chevron to purchase Noble Energy for an enterprise value of $13 billion. Announced in July 2020 and completed in October, the deal came during a vulnerable and highly uncertain time in the oil and gas market.
It was quite smaller than the Anadarko deal, but it was still a good business decision that took fortitude. Noble Energy gave Chevron acreage in Colorado's DJ Basin, 92,000 acres in the Permian, and other production assets.
Maintaining a strong balance sheet
The Noble deal wouldn't have been possible without a strong balance sheet. Financial health is paramount in cyclical industries like oil and gas. During periods of growth, companies can be tempted to overexpand their operations to maximize profits, which may lead to short-term gains but leaves a company more vulnerable to a downturn.
Finding the right balance between capitalizing on boom times and persevering during slowdowns is something that Chevron has done very well. Even today, it features the lowest debt-to-capital (D/C) and financial-debt-to-equity (D/E) ratios among the integrated oil and gas majors.
As you can see in the purple line above, Chevron has maintained a lower D/C and D/E ratio than its peers for most of the last five years. D/C compares a company's debt to its capital base, while D/E divides total liabilities by total shareholders' equity. Its D/C and D/E ratios have steadily fallen since oil and gas prices began rebounding, suggesting that debt is playing a smaller role in the company's capital structure. Chevron has been paying down debt, and its equity has increased from retained earnings.
Although Wirth has long stressed the importance of Chevron's balance sheet, he has discussed in recent earnings calls that the debt is so low that extra cash is better spent reinvesting in the business, buying back stock, or raising the dividend. He has a point.
Chevron has just $7.4 billion in total net long-term debt, which is extremely low for a company with an over $300 billion market cap. In other words, its balance sheet is in perfect shape, which will prove valuable if an acquisition opportunity rolls around or if there's an industrywide decline in oil and gas.
Keeping its dividend streak alive
Chevron and ExxonMobil never cut their dividends during the pandemic, while Shell (SHEL -0.26%), BP (BP 0.62%), and Equinor (EQNR -0.78%) all issued steep cuts. Chevron lost billions of dollars in 2020. But because its balance sheet was strong, it was able to keep its commitment to shareholders and pay dividends using debt and cash on hand.
The best dividend stocks are able to consistently raise their dividends through challenging times and recessions. Chevron has raised its dividend every year since 1990, a period that included many ups and downs in oil and gas.
Wirth and his team could have easily cut the dividend in 2020 or 2021 and blamed it on the pandemic. Looking back, that period provided a stress test for Chevron. And its ability to hold fast adds to its track record as a safe dividend stock despite being in a cyclical industry.
Investors can count on Chevron
The best companies focus on what they can control and prepare for what they can't control. In Chevron's case, the company did not overexpand in 2019. Even in 2022 and 2023, when the oil and gas industry has been thriving, Chevron has been very conservative with its spending without losing sight of its long-term goals and its ongoing effort to lower its production and operating costs.
The Chevron investment thesis is centered around discipline, both when it comes to capital spending and rewarding shareholders through buybacks and dividends. Mike Wirth was instrumental in transitioning Chevron from a company that used to spend a lot and was recovering from the 2014 and 2015 downturn, to a company with a working formula that can deliver results no matter the market cycle.
Chevron continues to be the top integrated oil major and is a rock-solid dividend stock that investors can count on for years to come.