Chevron (NYSE:CVX) recently published its 2022 Q4 results. Earnings were lower than analysts’ expectations, and Chenron’s share price fell back by around 4.5% to close at $179.45.
The CVX Q4 2022 earnings call gave us more insights to the numbers, as well as the future prospects for holders of CVX stock.
A Lower-Than-Expected Quarter in a Record Year
CVX reported EPS of $4.09 versus $2.56 per share in the corresponding quarter of 2021. Analysts had forecast a consensus estimate of $4.16 EPS. This lower-than-expected outcome contrasts with the Q3 EPS of $5.56 compared to expectations of $5.02.
Still, despite the earnings miss, CVX posted a record-breaking year:
- Q4 2022 revenues of $55 billion compared to $46 billion in Q4 2021
- Full-year revenues reached $227 billion in 2022, compared to $156 billion in 2021
- 2022 earnings of $35.5 billion were more than double the $15.6 billion posted in 2021
- On an adjusted basis, EPS for the full year were $18.83 versus $8.13 in 2021
Earnings Took a Hit Because of Margins
Adjusted earnings in Q4 were down almost $3 billion compared to the third quarter. The reason was higher costs as well as a lower oil price. CFO Pierre Breber explains:
“Adjusted upstream earnings decreased primarily on lower realizations and liftings, as well as higher exploration expense, partially offset by favorable timing effects.
“Adjusted downstream earnings decreased primarily on lower refining and chemicals margins and negative timing effects, partially offset with higher sales volumes following third quarter turnarounds.”
For the year as a whole, the company paid higher incremental royalties and production taxes because of higher oil prices, and benefitted from higher refining margins though maintenance and turnaround cost increased.
Chevron’s Dividend Keeps on Rising
Chevron announced that it would be increasing its dividends, and that it expects to do so again in 2023.
At $1.51 per share, it’s an increase of 6.3% from Q3’s $1.42 dividend. This makes a full-year payout of $6.04. At the stock price at the time of writing, this represents a dividend yield of around 3.4%.
With a payout ratio of less than 32%, Chevron has plenty of room to continue to increase it’s dividends.
Free Cash Flow Is at Record Levels
Operating cash flows reached record levels in 2022. Combined with efficiency in its use of capital (CVX delivered a 20% return on capital employed), free cash flow reached an astounding $37 billion in 2022.
The company is confident that it will continue to generate excess free cash flow that allows it to reward shareholders through dividends and share repurchases.
Breakeven Is At $50 Per Barrel
Oil and gas companies have fared exceptionally well in large part due to the rocketing prices of oil and gas. We’ve seen how a lower oil price has dragged on Chevron’s EPS in the fourth quarter. The question is, how low would the oil price have to fall to push CVX into a position that would impact its investment and dividend payments?
Pierre Breber answers this:
“With a breakeven Brent price around $50 per barrel to cover our capex and dividend and with excess balance sheet capacity, we’re positioned to return more cash to shareholders in any reasonable oil price scenario.”
In short, there is a huge amount of wiggle room here.
Debt Is Low ─ Really Low
CVX has paid down its debt in every quarter in 2022.
Its net debt ratio now stands at just 3%. Its balance sheet is strong, bolstered further by fantastic cash flow.
CVX Plans To Buy Back a Huge Number of Shares
Chevron is no stranger to buying back its own shares. In fact, it has done so in three of every four years during the last two decades, spending a total of $65 billion on repurchases and paying below-average market price.
It has said that it will buy back $75 billion of its shares through market operations, though has put no expiry date on this. This gives it the firepower to purchase up to around 21% of its shares outstanding.
CVX Has Four Financial Priorities
Both CEO Mike Wirth and CFO Pierre Breber spoke about the four financial priorities that drive CVX business strategy:
- Maintain and grow the dividend
- Fund capital programs for future earnings
- Maintain financial strength and discipline
- Return surplus cash to shareholders
“We’ve been consistent with them for a very long time,” says Breber. “And three of the four are pegged.
“We just increased our dividend 6%. We have a 2023 capex budget of $14 billion. We’ve given guidance that keeps that capex flat over the next several years. And we have the buybacks at the top end of the guidance range of $15 billion. So, swings in cash flow in the short-term will go to the balance sheet. And that’s because commodity prices and margins, we just were talking about natural gas prices and refining margins and things are moving up and down. But over the long term, those cash flows will be returned to shareholders.
“That means there’ll be a time period where we’ll be buying back shares off the balance sheet, and we’ll lever back up closer to that 20% to 25% guidance.”
The Bottom Line
Falling oil and gas prices pressured Chevron’s earnings in the fourth quarter, and revenues weren’t helped by lower production compared to a year earlier. On top of this, the company also took on more than $1 billion in write-offs and impairment charges. Despite all this, CVX had a record year – enabling it to reduce debt, return capital to shareholders, invest in its businesses, and deliver unprecedented free cash flow.
Of course, macroeconomic concerns persist, and these could further pressure oil and gas prices. However, uncertainty over supply continues – though OPEC plans to limit output, it is unlikely that the United States will release any more of its Strategic Petroleum Reserve, and Russian production is accompanied with a big question mark – and this could push oil prices higher. CVX plans its own production to grow by up to 3% in 2023.
CVX is investing in businesses that will drive future growth. And it’s generating huge amounts of cash with an almost non-existent debt ratio. In short, CVX is perfectly positioned to take advantage of rising oil prices, while also being cushioned from falling prices.
Mike Wirth summarizes it thus:
“We don’t know what’s ahead in 2023. I do know that Chevron’s approach will be clear and consistent, focused on capital, cost, and operational discipline, with the objective to safely deliver higher returns and lower carbon.”
The company’s track record should leave investors in no doubt of its ability to continue to deliver on its four financial priorities.