Oil price volatility will always affect Chevron‘s (NYSE: CVX) financial results. That was evident in the first quarter as its earnings fell compared to the year-ago period. Meanwhile, the decline in crude prices in the current quarter has led the oil company to slow the pace of its share repurchase program.
However, despite all this, Chevron’s strategy is paying off. The oil giant is producing lots of cash, the bulk of which it’s returning to shareholders via dividends and buybacks. With its cash flow on track to surge over the next year, it’s in an excellent position to continue growing shareholder value.
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Drilling down into the latest quarter
Chevron reported $3.8 billion, or $2.18 per share, of adjusted earnings during the first quarter. While that was down from the year-ago level ($5.4 billion or $2.93 per share), it did exceed analysts’ expectations ($2.16 per share). “This quarter reflected continued strong execution and progress on our objective to deliver superior shareholder value,” stated CEO Mike Wirth in the earnings press release.
The company battled several headwinds in the quarter, including lower oil prices, weaker refined product margins, and unfavorable tax and foreign exchange effects. Its production was roughly flat in the period as asset sales (including selling its Canadian assets) offset the growth from TCO (Kazakhstan), the Permian Basin, and the Gulf of Mexico (also known in the U.S. as the Gulf of America).
Chevron’s TCO output jumped 20% as it completed the Future Growth Project. Meanwhile, production in the Permian increased 12% due to investment and efficiency gains and rose 7% in the Gulf due to the Ballymore and other recently completed projects.
Chevron produced $7.6 billion of cash flow from operations during the period and $3.7 billion of free cash flow (excluding working capital adjustments). The company used its excess free cash and strong balance sheet to return $6.9 billion to shareholders during the period. It paid $3 billion in dividends and repurchased $3.9 billion in shares.
Chevron also spent $2.2 billion to buy nearly 5% of Hess‘ (NYSE: HES) outstanding shares, driven by its confidence that it will close that needle-moving acquisition this year. The company ended the period with a 14.4% net leverage ratio, which is still well below its 20% to 25% target range.
Cautious yet optimistic about what’s ahead
“Despite changing market conditions, our resilient portfolio, strong balance sheet, and consistent focus on capital and cost discipline position us to deliver industry-leading free cash flow growth by 2026,” commented CEO Mike Wirth in the earnings press release. Chevron is on track to deliver $9 billion to $10 billion of additional free cash flow by next year, assuming Brent oil is in the $60 to $70 a barrel range (the global benchmark was recently in the low $60s). Growth drivers include TCO, the Gulf, the Permian, and other catalysts such as its structural cost savings plan.
That strong free-cash-flow growth puts Chevron in an excellent position to continue returning lots of cash to shareholders. However, given the weakness in crude oil prices this year (Brent has tumbled about $20 a barrel from its peak due to concerns that tariffs will slow the global economy), Chevron believes it’s prudent to slow its share repurchase pace for the time being. The company expects to buy back $2.5 billion to $3 billion of stock during the second quarter, down from $3.9 billion last quarter. That still has it on track to repurchase shares above the low end of its $10 billion to $20 billion annual target range.
Chevron’s plan doesn’t factor in closing its pending $53 billion acquisition of Hess, which it signed in late 2023. The company is currently engaged in a dispute with ExxonMobil over Hess’ stake in the oil giant’s world-class Guyana assets. The oil companies have agreed to arbitration, with the court date set for May 26th.
Chevron is so confident it will win that it capitalized on a decline in Hess’ stock to buy nearly 5% of its outstanding shares on the open market. If Chevron wins, it will promptly close the deal, which will significantly enhance and extend its ability to grow its production and free cash flow in the coming years.
A high-quality oil stock
Chevron’s strategy of investing in projects that will grow its cash flow is paying off. Its free cash flow is on track to surge over the next year, giving it even more cash to return to shareholders via its lucrative dividend (5% recent yield) and share buybacks. While the company is taking a cautious approach to buybacks in the near term, it could ramp up its pace as its cash flow rises. Add in the upside potential from the prospect of finally closing its Hess deal, and Chevron remains an attractive option for investors seeking income and outsized total return potential.
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Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
