Large-scale stock buyback programs in the oil patch often draw a mixed response from investors. This is for the very simple reason that buybacks inevitably occur when cash flow is plentiful before being promptly abandoned when it dries up during downturns. A more interesting policy (at least to me) would be to store up mountains of cash during the good times and then use that to fund cheap acquisitions, capital spending programs, higher dividends and/or share repurchases during downturns. Or, failing that, to at least commit to a steady program of capital returns maintained right the way through the cycle.

In practice, I think that Wall Street and the “returns right now” mentality of our age preclude management teams from acting wholly in this way, even if were to benefit long-term shareholders possessing a 10-plus year outlook.

The above said, Chevron (CVX) strikes me as a fairly good example of how to do things. Historically, the deal with Chevron was that it made underlying returns that fell slightly below that of Exxon Mobil – between 2007 and 2022 Chevron generated an average annual return on capital employed that was about 4 points or so lower than Exxon’s average over the same period. If you look at respective C-suite guidance, you’ll further find that Chevron’s 2022-2027 ROCE target also lands around 3-5 percentage points lower than Exxon’s. For whatever reason Exxon is just a more profitable beast than Chevron is, pound-for-pound.

The above did not prevent Chevron stock meaningfully outperformed Exxon Mobil over the 2007-2022 period – the former delivering average annual returns of 10.1% between YE 2006 and YE 2022 versus 6.15% for Exxon. I believe this is a fair apples-to-apples comparison in terms of cyclical earnings, with the start and end years representing fairly similar levels of profitability (Chevron earned a 23% ROCE in 2007 and a 20% ROCE last year).

While I’m sure not everything has been hunky dory at the San Ramon HQ over the past 15 years, when Chevon’s long-term shareholders digest the above I believe they will be very satisfied. Did the stock generate double-digit annualized returns? Check, and that period includes two or three oil downturns too. Did these returns require skimping on investing in the underlying business in order to guarantee future levels of business activity? It appears not. In fact, management appears to have been fairly diligent in investing for the future of the business, replacing over 100% of its proved reserves over the past fifteen years and fully offsetting the volumes of oil & gas lost via production. Finally, is this a fair comparison taking into account similar points in the business cycle. I think so, yes.

Interestingly, and unlike Exxon Mobil, Chevron has not been a particularly big purchaser of its own stock these past 10-15 years or so: its share count only fell at 0.6% annualized clip over the 2007-2022 period, whereas Exxon reduced its count at a circa 1.8% per annum rate over the same timeframe. For much of that time, Chevron offered investors a slightly higher cash dividend yield in lieu of significant share repurchases (Chevron stock’s annual dividend yield averaged circa 1% higher than Exxon stock between 2007 and 2017).

With the above in mind, I find it interesting that Chevron is once again returning to large scale share repurchases, with management expecting to spend $10-20 billion per annum on buybacks between 2023 and 2027. The reason I find it interesting is the implicit levels of capital returns earmarked for periods of lower industry profits. For example, management’s downside scenario has Brent averaging $50 per barrel nominal across 2025-2027, or $60 average across 2023-2027. That corresponds with the lower bound of its annual buyback budget. That means that in its downside case Chevron still expects to spend $50 billion cumulative on share buybacks in the 2023-2027 period. At the current $172 stock price, that’s 3% of the share count per annum, rising to 6% at the upper bound of its buyback budget (should oil prices allow). If my spreadsheet is accurate, you’d have to go all the way back to 2008 to find the last time Chevron conducted buybacks on that scale (it retired around 4% of its outstanding shares that year).

Although not a perfect solution, the above does at least raise the prospect of significant levels of buybacks occurring when its share price is not at a cycle peak. Because Chevron has made so much money these 18 months or so – it reported net income of $35.5 billion last year alone – it wouldn’t have to stretch its balance sheet too much to fund this in its downside scenario: net debt is now under $6 billion, having approached $40 billion at the end of 2020. I would add that this is all on top of the regular dividend too, which is currently at around $6.04 per share and costs around $11.5 billion each year. Based on a 12% ROCE I expect this would be ballpark breakeven at $60 oil prices.

All said and done, this would go quite a long way to satisfying the “steady program of capital returns maintained through the cycle” policy I outlined in the introduction. As a result, like Exxon I think there is a good chance that the next apples-to-apples comparison will be a favorable one for Chevron stockholders.

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