Oil prices have slumped this year. Brent, the global oil benchmark, has fallen nearly 15% already this year and was recently in the low $60s. Several factors have weighed on crude oil prices, including OPEC's decision to increase its production at a time when global demand growth is slowing because of tariffs.
Lower oil prices will affect most oil stocks. However, some companies are in a better position to weather lower oil prices than others. Chevron (CVX +2.38%) is one of those companies. Its resilient portfolio and fortress balance sheet position it to thrive even if oil prices remain low over the next few years.
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A cycle-tested business model
Chevron has proved the durability of its integrated business model over the decades. It operates oil and gas production, midstream, refining, and chemicals businesses. One evidence of its success is the oil giant's dividend. CEO Mike Wirth highlighted this factor on the oil company's recent first-quarter conference call: "We've grown our dividend for 38 consecutive years, through multiple commodity cycles, leading our peers in growth over the last decade."
The company currently has the second longest dividend growth streak in the oil patch behind ExxonMobil. It has delivered faster dividend growth than Exxon and others over the past decade, which is impressive considering all the volatility in the sector during that period. Many other oil companies had to cut their dividends when oil prices slumped.
In addition to paying a growing dividend, Chevron steadily repurchases shares. Wirth noted on the call, "We've repurchased shares 18 of the last 22 years, and bought back at record levels in the past two years." From 2004 through 2022, Chevron repurchased an average of $3 billion of its stock each year. It has significantly ramped up its buybacks in recent years, repurchasing an average of $15 billion annually in 2023 and 2024.
Chevron's strong balance sheet is a big factor driving its ability to steadily return cash to its shareholders. Over the past decade, Chevron has routinely maintained a leverage ratio at or below its peer-group average. Wirth noted on the call, "Our balance sheet remains strong, with a net debt ratio of 14%, well below our target range of 20% to 25%.
More than ready for the next down cycle
Chevron has spent several years investing heavily to build more resiliency into its upstream portfolio. The company has acquired low-cost resources to reduce its cost of supply. For example, in 2020, Chevron bought Noble Energy for $5 billion in a deal that increased its proven oil and gas reserves by 18% for a cost of less than $5 per barrel of oil equivalent. Meanwhile, in 2023, it bought PDC Energy for $7.6 billion, boosting its oil equivalent resources by 10% for less than $7 per barrel.
As a result of these deals and its organic exploration efforts, Chevron has the lowest breakeven level for its base business in the industry at around $30 a barrel this year, according to an estimate by Wood Mackenzie. That highly resilient upstream portfolio will enable Chevron to continue generating lots of cash in the current environment.
Meanwhile, the company is investing heavily in growing its low-cost production. Chevron's current slate of growth projects in the likes of Kazakhstan, the Gulf of Mexico (also known as the Gulf of America in the U.S.), and the Eastern Mediterranean will add significant incremental cash flow over the next two years. At $60 Brent, Chevron will produce an additional $9 billion in annual free cash flow by next year. Chevron is also working to close its $60 billion megadeal for Hess, which would add even more low-cost oil resources and free cash flow growth to its portfolio.
This anticipated surge in free cash flow and its strong balance sheet positions Chevron to continue growing its dividend and buying back shares despite the recent downdraft in crude prices. The company expects to repurchase $10 billion to $20 billion of its stock each year over the next few years. It can adjust its repurchase rate up or down depending on oil prices. It currently expects to repurchase $2.5 billon to $3 billion of its shares in the second quarter, which is a $10 billon to $12 billion annual pace.
A resilient oil stock
Few companies are in a better position to thrive in an environment with lower oil prices than Chevron. The company has the lowest upstream breakeven level in the industry at around $30 per barrel this year and one of the strongest balance sheets in the sector. Meanwhile, it expects to deliver significant incremental free cash flow growth over the next two years, and that's before closing its needle-moving acquisition of Hess. These factors put Chevron in a strong position to grow shareholder value in the current environment, making it a great oil stock to buy and hold right now.
