Chevron Sets Dividend Growth & Other Priorities For 2018

Chevron Corporation (NYSE:CVX) recently issued a statement at its latest annual analyst day, bringing in pleasant news for its investors. The California-based supermajor highlighted its commitment toward dividend growth as its top priority. It also laid emphasis on prudent reinvestment in the business, strengthening of financials and cash flow generation. It updated its guidance related to capex, production, margins and other details along with emphasizing on its growing free cash flows.

Higher Payouts to Attract Investors

Dividend growth remains the topmost priority for management. As it is, the diversified oil company has a long and consistent dividend-paying track record. It is one of the only two energy stocks on the list of Dividend Aristocrats — a group of 51 companies in the S&P 500 Index that have raised their payouts for more than 25 years in a row. Notably, Chevron has increased its dividend for 30 consecutive years. Over the last decade, the company has witnessed dividend growth of 7% per year. On the back of solid execution and cash flow generation, the company remains committed to maintain its dividend growth in the coming years.

Prudent Outlay to Boost Cash Flow

Chevron, which has focused on its cost-containment strategies amid the industry downturn, still emphasizes the need of operational efficiency and capital discipline to strengthen its cash flows. For 2018, the company has set its capital expenditure at $18.3 billion (versus 18.8 billion of capex in 2016), with the bulk of spending directed toward its upstream operations. Notably, 2018 represents the fourth consecutive year of reduced capital spending by the integrated major. Further, the company lowered the upper end of the capex guidance and now plans to spend $18-$20 billion per annum through the end of the decade versus the prior guidance of $17-$22 billion per annum.

Stepped Up Production

Despite the capital discipline, the supermajor forecasts a year-over-year increase in net production of 4-7% in 2018, with 2-3% output gain from the base and shale/tight oil assets. This compares with the 5% net production growth achieved by the company in 2017 on a yearly basis. Chevron believes that its solid execution and strong portfolio of major high-margin capital projects will enable it to sustain the production momentum through 2020.

Chevron is poised for production and margin growth on the back of solid execution of its major projects, including Australian LNG projects (Gorgon and Wheatstone), along with various other projects such as Stampede, Hebron and Big Foot.

Importantly, the company is highly optimistic about its prospects in the Permian Basin, which is likely to be one of the largest contributors to its total output growth. The company expects its Permian production to reach 500,000 barrels per day (Bpd) by the end of the decade and 650,000 Bpd by the end of 2022. This reflects major growth from the 2017 production level of just more than 200,000 Bpd. Notably, Chevron’s rival ExxonMobil Corporation (NYSE:XOM) also plans to triple its net Permian output to more than 600,000 Bpd.

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Inorganic Growth Strategies

Chevron also targets asset disposal worth $5-$10 billion through 2018-2020 in an attempt to exit the non-core holdings and strengthen its cash flows. The company also plans to tap strategic acquisition opportunities to streamline and high grade its portfolio, thereby increasing shareholder value.

Impressive Flow of Cash

Chevron expects its cash flow to improve significantly on the back of cost reduction, exiting unprofitable markets and streamlining the organization. The company expects cash generation of about $14 billion at $60 a barrel (with free cash flow of $8 billion after dividend payouts), and cash flow breakeven at $50 oil price without asset sales.

Is Buyback in the Cards?

It also laid stress on strengthening its balance sheet and maintaining investment-grade credit rating with a debt-to-capitalization ratio of 20%. While the company has not notified anything in specific about the share repurchase program, it did signal that the increasing free cash generation through production boost and cost cuts may help it to carry out share buybacks sometime this year after three years of a hiatus.

Zacks Rank and Key Picks

Chevron carries a Zacks Rank #3 (Hold).

Chevron Corporation Price