Chevron: A Good Lesson

by The Compound Investor

A week feels like a really long time at the moment. Although I posted seven days ago, much of the content surrounding coronavirus already feels obsolete. Completing a house move this week may prove great timing in hindsight! I can now get back to posting more regularly as well. Anyway, where to begin? Fears surrounding the cost of the pandemic look well founded. The human cost obviously looks very concerning, and economically many folks are using the R-word.

Though there is much to discuss, energy seems the place to start. Brent crude oil currently trades around the $33.50 per barrel mark. Three weeks ago it was around $60. Between them, coronavirus and the Saudi price war have taken almost 50% off the oil price in just a fortnight. That’s both a supply and demand shock acting right around the same time. Heck, just three months ago coronavirus didn’t even exist.

It goes without saying, but this has totally decimated energy stocks. Exxon Mobil, the major I’ve covered most recently, now trades for under $42 a share. That’s around 40% below its starting 2020 level. Occidental Petroleum – a rung below the majors – is down over 70% over the same timeframe. It slashed its dividend by 86% earlier in the week.

A Good Lesson

One of the talking heads on CNBC made a comment on Tuesday that I have been thinking about. I’m paraphrasing here, but basically he said folks in the energy space are about to learn a real good lesson. I agree. This is the part where the tide goes out and we find out which companies have been swimming naked.

This is also where Chevron (CVX) comes in. Of the five majors, the California-based giant has held up slightly better so far. At time of writing it is down around 30% since the start of the year. Just by way of comparison, the other four – Exxon, Shell, Total and BP – are down anywhere between 35% and 43%. Now, it is perfectly possible that gap will close at some point. That said, it does not seem to be a coincidence that Chevron also sports the lowest gearing level out of the five.

Almost one year ago I wrote that Chevron looked like it was doing the right thing. After cash dividends and cash capital spending, it generated around $12,500m in surplus cash between the start of 2018 and end of 2019. Much of that dropped straight down to the balance sheet. As a consequence the company is in a relatively solid position going into this slump.

To provide some color to that statement, let’s consider its debt situation. The company sported around $27,000m worth at the end of 2019. Cash & equivalents clocked in at just under $5,700m, so let’s call net debt $21,300m. Here’s the thing – in practical terms just $3,300m is due over the course of 2020. In theory Chevron could meet that with cash on hand.


The question a lot of folks have: how bad is the dividend situation? Well, for every dollar change in Brent the cash flow line is impacted by $450m. That figure is based on company projections for fiscal year 2020. Last year, Chevron generated $27,300m in cash from operations. That was at an average Brent oil price of $64 per barrel. With Brent now circa $30 per barrel lower, that works out to a $13,500m annual hit to cash from operations (“CFO”) according to the above guide.

Here is where it gets a bit tricky. Capital spending for 2020 is currently slated to clock in at $20,000m, but around $6,200m of that is attributed to affiliated companies. Cash capital spending should therefore come in at around the $13,800m mark. After that, the company sees itself spending between $19,000m and $22,000m out to 2024. The average annual non-cash component of that is circa $3,000m. Obviously these figures are subject to review with oil below $40 per barrel. Free cash flow projections therefore become a bit murky, but for the purposes of this article I’ll just stick with the above figures. On that basis, I have free cash flow at more or less zero at current oil prices.

Now, the current $1.29 per share quarterly dividend costs Chevron around $9,600m per annum. Or put another way, Chevron’s post-dividend free cash flow currently runs at negative $9,600m per annum assuming the above numbers are correct. Based on its current debt load, the company could withstand that cash bleed for longer than the vast majority of listed oil companies.

Obviously the situation is still incredibly volatile. My gut feeling is that both oil and Chevron’s stock price have further to fall. It yields a 6.2% dividend, but I don’t believe we have seen a bottom here by a long shot. That said, Chevron is arguably the best placed oil & gas company to deal with low prices right now.


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