Chevron (CVX 0.37%) just made an unusual move. It released preliminary numbers for its second quarter, deviating from its usual policy of directly announcing its quarterly numbers. But the company just pulled off something bigger: Chevron has waived the mandatory retirement age of 65 for its CEO. That means Mike Wirth, who will turn 63 this year, will continue to lead the oil and gas producer for the foreseeable future.
That's huge.
Wirth joined Chevron as an engineer in 1982 and oversaw much of the company's downstream, chemicals, and midstream businesses in the years that followed before taking the helm in 2018. Today, Chevron is the world's third largest oil company by market capitalization, just behind Saudi Arabian Oil Group -- better known as Saudi Aramco -- and ExxonMobil.
Chevron's production, cash flows, and dividends have grown steadily since Wirth took over, and the CEO has already lined up big plans for the company for at least the next five years. Here's all you need to know about Wirth's plans, and why Chevron's stock is too cheap and compelling to pass up now.
Rapid cash-flow growth ahead
For a commodity stock like Chevron, the key to holding up during tough times and thriving during others lies in two things: the ability to flex production, and investing capital where it's needed the most. Chevron is doing both right under Wirth's leadership.
In 2020, which was an exceptionally challenging year for the oil and gas industry, Chevron swiftly cut production and slashed capital spending by nearly 35%. At the same time, Chevron acquired Noble Energy for a low price tag to take advantage of the industry downturn.
Fast-forward to 2022, and Chevron's earnings and cash flows zoomed to record highs, driven by record production in the Permian Basin. Chevron's plans for 2023 are even bigger, with a capital expenditure budget that's 30% higher than last year.
Chevron's capital discipline shone through in 2022, when its return on capital employed (ROCE) hit 20%, a level last seen in 2011. In a capital-intensive industry like oil and gas, ROCE serves as an excellent gauge to compare company performances. Chevron's ROCE has grown at a faster clip than rivals since Wirth took over.
Image source: Chevron.
Chevron sees a steady ROCE in the years ahead and expects to grow its annual free cash flow (FCF) at an average rate of 10% or more, even at Brent crude price of only $60 per barrel. While that reveals Chevron's capital efficiency, it also means large potential returns for shareholders.
Chevron will remain a dividend powerhouse
At Chevron's Investor Day event in February, Wirth reiterated the company's long-term financial goals as follows, ranked in order of priority:
- Grow dividends consistently.
- Reinvest in the business.
- Pare debt and maintain a strong balance sheet.
- Buy back shares.
Chevron raised its share buyback guidance the same day, even though buybacks are least in priority in terms of the use of cash for the company. So even in a $50-per-barrel Brent crude year, Chevron intends to buy back shares worth at least $10 billion.
Image source: Chevron.
Here's what that means: Even in such a low oil-price environment, Chevron expects to be so flush with cash in the coming years that it will increase dividends, pay down some debt, invest in its projects pipeline and perhaps even acquisitions, and still have $10 billion left to repurchase shares every year.
This kind of visibility and confidence in its cash flow-generating capabilities, especially from a cyclical company, is rare these days.
For investors who buy Chevron shares now, all of this means even if the stock price fluctuates alongside oil and gas prices, your dividend checks will keep coming and even get fatter every year. Chevron has increased its dividends annually for the past 36 years now, and the stock yields 3.9%. Again, Chevron's dividends have grown at a much faster pace than have those of its peers under Wirth's leadership.
Why Chevron stock is a screaming buy
Chevron's production is growing, cash flows are at record highs, dividends are rising, and its CEO wants to take the company to greater heights. Yet the market seems to have gotten so carried away by the macro-environment that it has failed to give the oil stock its due. Right now, Chevron is trading significantly below its five-year averages on two key valuation counts -- price-to-cash flow and enterprise value-to-EBITDA.
CVX Price to CFO Per Share (TTM) data by YCharts
That's cheap, especially when Chevron has another big catalyst around the corner: It is about to acquire PDC Energy in August in an all-stock deal worth $7.6 billion, including debt. PDC should boost Chevron's reserves and footprint substantially. Chevron expects the acquisition to be accretive within the first year of closing and add about $1 billion in annual FCF at Brent crude price of $70 per barrel.
The deal looks like a win-win for Chevron. And at current prices, Chevron stock -- which is also a top Warren Buffett holding -- looks like a win-win for long-term investors in oil.
