Chevron Anticipates Generating an Unrestrained Cash Flow of Up to $8 Billion
Chevron, with its astounding free cash flow of over $10 billion in the first nine months of last year, is already in a blooming financial position. The energy titan is determined to pump up this cash surge even more, aiming to increase its annual free cash flow by a staggering $6 billion to $8 billion by 2026. Here's a glimpse into the forces propelling this bullish outlook.
Diversified Growth Catalysts
Recently, Chevron CEO Michael Wirth voiced his conviction that the company could amplify its free cash flow by $6 billion-$8 billion by the next year. Wirth pinpointed several drivers set to fuel Chevron's projected gush of excess cash over the following years.
One of these powerhouses is the Gulf of Mexico. With plans to elevate its daily output from 200,000 barrels of oil equivalent (BOE) per day last year to 300,000 BOE per day by 2026, Chevron's operations in the region could witness a substantial leap. This week, Chevron and partner Shell initiated oil production at their Whale facility, which holds a 40% stake for Chevron. The project aims to reach a production height of 100,000 BOE per day during its initial development phase. Moreover, Chevron has ignited production at its Anchor project and initiated water injection operations at two legacy fields to ramp up their output.
Additionally, Chevron anticipates initiating a new project in Kazakhstan this year, as well as proceeding with the development of its U.S. onshore assets in the Permian and DJ basins. These high-margin projects will contribute fresh cash flow to the company.
Another crucial factor in Chevron's financial plans is cost reduction. Wirth mentioned that the company is on track to shave off "a couple billion dollars" from its expenses. This decrease will go straight to the bottom line and enhance the firm's free cash flow.
Lastly, while face-offs with rivals Exxon and China's CNOOC have posed impediments in closing the Hess deal, Chevron maintains faith in its arbitration hearing. If successful, the acquisition can swiftly follow. Chevron initially believed that securing Hess would bolster its free cash flow by more than doubling its figures by 2027, assuming a $70 oil price. Even without Hess, Chevron was poised to deliver more than 10% annual free cash flow growth during this period (assuming a $60 oil price) via the strength of its organic expansion projects.
What Happens to All This Extra Cash?
Already generating more cash than necessary to sustain operations and expansion, Chevron has showcased this superabundance through its robust capital return program. During the third quarter, Chevron returned a record-breaking $7.7 billion to its shareholders, including around $4.7 billion in repurchases and roughly $2.9 billion in dividends. Exceeding its free cash flow ($5.2 billion), Chevron leveraged its solid balance sheet to return more money to shareholders.
Despite these significant debt-funded returns, Chevron ended the period with an 11.9% leverage ratio, well beneath its target range of 20% to 25%. In the near future, the ratio is expected to decrease further after Chevron sealed a $6.5 billion deal to sell its Canadian assets, a component of its strategy to offload $10 billion to $15 billion of noncore assets through 2028.
Given its low-leverage balance sheet, Chevron is most likely to continue directing the bulk of its excess cash to its shareholders. The company is set to preserve its streak of boosting its dividend (over 35 consecutive years) and delivering peer-leading dividend growth during the past five years, including a 8% hike in early 2024. With such a track record, Chevron may continue to elevate the dividend at a notable pace.
Moreover, Chevron is likely to aim at repurchasing shares near the upper end of its $10 billion to $20 billion annual target range. This would enable the company to retire approximately 6% of its outstanding shares each year at its current valuation. In addition, Chevron may opt to use its excess cash to further bolster its already extraordinary balance sheet. This would provide the firm with even more financial maneuverability during the next oil market downturn. At present, Chevron has the financial ability to fund its capital program, a growing dividend, and repurchases at the low end of its target range through 2027, given oil prices are averaging $50 per barrel.
A Finely Tuned Machine
With Chevron expecting tostack on several billion dollars to its annual free cash flow over the next couple of years, shareholders can anticipate a more substantial return of cash to stockholders through a growing dividend and meaningful share repurchases. This symphony of growing cash flow and cash returns could propel Chevron to surpass its industry peers in the ensuing years.
- To further bolster its financial position and reward shareholders, Chevron intends to invest a significant portion of its increased free cash flow from projects like the Gulf of Mexico and cost reduction efforts into its capital return program, potentially leading to higher dividends and share buybacks.
- Given Chevron's strong financial position and robust cash flow, analysts predict that the company will continue to prioritize returning value to shareholders through dividend increases and share repurchases, positioning Chevron as a top performer in the finance sector in the coming years.
