It would be remiss of me to leave out fellow US super-major Chevron (CVX) having recently covered Exxon Mobil. Remember the former had arguably the worst outlook of the big oil companies back in the dark days of 2015 and 2016. By that I mean that its relative post-dividend cash burn figure topped all of the other majors back then. To be a bit more precise, Chevron spent $17b more on capital expenditure and dividends than it generated in cash flow back in 2015.
That situation doesn’t sound particularly healthy, at least at first glance, but in reality this is pretty much exactly how oil & gas companies should operate. In times of favorable, or even modest commodity prices, they make more money than they know what to do with. They should then be in decent condition to ride the downturns out whenever they arrive. For example, back in 2012 the price of Brent crude oil averaged $110 per barrel. Chevron ended that year with over $20b in cash versus just $12b of total debt.
The tough part for energy investors is remaining calm during the subsequent down years. Take the great 2014 to 2016 oil price crash as a good guide. It totally flipped Chevron’s balance sheet on its head: by the end of 2016 the company sported a net debt position of just over $39b.
How many folks at the time thought that totally unsustainable? Many I’d wager. In reality this was entirely normal behavior for a cyclical company. After all, Chevron didn’t exactly blow all of that cash it raised via debt issuance. It now has an extra one billion barrels in reserves versus 2014 and it produces around 500,000 barrels more per day. The key takeaway is that leveraging up during cycle lows is fine. The trick is to rake in the cash during the good times too.
Here is where it gets exciting for all the Chevron shareholders out there. This year, cash capital expenditure will clock in at around $13.5b, roughly similar to last year’s spend. Now, Chevron generates around $30b in annual cash flow from operating activities at current Brent crude oil prices. Subtracting a one billion dollar per quarter stock buyback program, plus its dividend commitments, still leaves several billion dollars in surplus cash for 2019.
With oil prices in the $60s-70s per barrel area, the net result is that Chevron is once again printing cash and shoring up its balance sheet. Right now I am minded to prioritize that over stock buybacks for two reasons. Firstly, I like conservative balance sheets. It is worth remembering that Chevron paid $750m last year in interest payments on its debt. That is equivalent to taking off around 70¢ for every barrel equivalent of hydrocarbons produced that year. More importantly, cyclical companies make hay while the sun shines. That then allows Chevron to deploy a stronger balance sheet to acquire reserves or buy back stock in the next downturn.
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