Shares of Chevron (CVX 0.37%) slumped 16.9% in 2023, according to data provided by S&P Global Market Intelligence. That vastly underperformed the broader market, with the S&P 500 gaining 24% last year.
A few issues weighed on the oil stock last year. Falling oil prices were the most notable issue, impacting its earnings and cash flow. On top of that, Chevron went on an acquisition spree, which added some integration risk.
Chevron went shopping as oil prices slumped
Crude oil prices cooled off in 2023. Brent, the primary global oil price benchmark, fell 10.3% for the year, closing at $77.04 per barrel. That was the first down year for oil since 2020.
Falling oil prices cut into Chevron's earnings and cash flow. The oil company's adjusted earnings totaled $18.2 billion through the third quarter, a more than $10 billion decline from the year-ago period. Meanwhile, Chevron's cash flow from operations tallied $23.2 billion over the first nine months of last year, a nearly $14 billion decline from the prior-year period.
However, Chevron capitalized on the more challenging market conditions by making several acquisitions last year. It bought PDC Energy in a $7.6 billion deal, enhancing its DJ and Permian basin positions. The company expects that acquisition to add $1 billion to its annual free cash flow this year, assuming oil prices average $70 a barrel, right around current prices. Chevron also bought a majority stake in ACES Delta, the country's largest green hydrogen production and storage hub, further advancing Chevron's lower-carbon investment strategy.
Meanwhile, Chevron unveiled an even bigger transaction in October, agreeing to buy fellow oil producer Hess in a $60 billion all-stock deal that could close this year. The deal will add two new regions to Chevron's portfolio (Bakken and offshore Guyana) while bolstering its operations in the Gulf of Mexico.
The oil company believes the deal will enhance and extend its free-cash-flow growth profile into the 2030s. That drives the company's plans to increase its dividend by 8% this year and ramp its repurchase rate to the top end of its $10 billion-$20 billion range.
However, the deal adds some risk. Bakken and Guyana are new areas for Chevron, adding potential integration issues. Further, Guyana is in a border dispute with Venezuela, which could impact Chevron's growth.
Is Chevron stock a buy after last year's slump?
Chevron has spent heavily to become a free-cash-flow growth machine. The Hess deal would enhance its ability to produce cash (and return it to shareholders) into the 2030s. It's also investing in lower-carbon energy to extend its growth runway into the future. These factors make Chevron a compelling oil stock to buy for the long haul, especially after last year's decline.
