Chevron – Good For Retirement Income

CVX - Chevron

Chevron Corporation (CVX) is one of the leading integrated energy companies in the world. It engages in the exploration, production, and transportation of crude oil and natural gas; refining, marketing, and distribution of fuels and lubricants as well as the manufacture and sales of petrochemicals.

The company’s reportable segments are Upstream (78% of 2018 earnings – exploration and production) and Downstream (22% – refining, marketing, and chemical manufacturing).

As a global energy company, Chevron has substantial business activities in over 27 countries including the USA, Asia, UK, and Australia. The U.S. accounts for nearly 30% of the company’s earnings while international business constitutes the remaining 70%. The company owns assets worth $260 billion all around the globe comprising of conventional and unconventional crude oil and natural gas, heavy oil, LNG and deepwater assets. Chevron has a net oil-equivalent daily production capacity of 2.9 million barrels and 12.1 billion barrels of proved reserves. Its downstream and chemicals business is focused on petrochemicals, lubricants, and additives.

Investment Data

Revenue Growth & Market Exposure

Chevron has a diversified, high quality asset portfolio across the entire supply chain. Its portfolio is characterized by long-lived upstream assets with low production decline complemented by an efficient, high-return downstream business. The company has a holistic presence in the upstream, midstream and downstream parts, catering to the entire energy value chain. This insulates the company from pricing fluctuations in any one of the segments. Favorable demand trend for Chevron’s products is further supporting a stronger and more resilient product portfolio.

Chevron is growing organically and through acquisitions. The company has also made ambitious growth plans by buying stakes in some of the leading global energy projects. Chevron recently completed the acquisition of Pasadena Refining System, Inc. from Petrobras, which will improve its retail outreach. The company has also announced an agreement to acquire Anadarko Petroleum Corp. The transaction is estimated to be accretive to free cash flow and earnings after one year.

Chevron’s Wheatstone project and the Gorgon LNG project are expected to be significant revenue generators for the company. These projects will play a key role in meeting the clean energy demand in the Asia-Pacific region.

Chevron has a wide competitive moat around its business. The company operates in a very resource extensive industry requiring continuous investments in the form of new construction, acquisition, maintenance of assets, modernization of plants and machinery, the building of extensive pipeline and distribution networks, etc. Chevron has also been investing in technology across all its business segments to improve revenues and efficiency, and reduce costs.

The company is expecting to grow its future production levels driven by increased activity in Permian Basin, startups in the Gulf of Mexico and Australia, and ramp-up of LNG operations in Australia.

Dividends

Chevron has increased its dividend for 31 consecutive years and has also returned $1.75 billion of cash to shareholders through stock repurchases. The company has managed to raise its dividend even during low commodity prices when the average annual crude oil price hit a 10-year low.

Chevron has grown its dividends at 5.9% CAGR over the past decade. It last raised its dividend payout by 6% and announced $4 billion in share buyback in 2019. The company sports an annual dividend yield of more than 4% and a dividend payout ratio of 60%. The company’s profitability is dependent on crude oil price which is expected to range in between $62-$65 per barrel in 2019-2020. This should allow Chevron to increase its dividend in the low to the mid-digit range.

Chevron’s portfolio of quality and diversified assets are well positioned to deliver strong cash flows and superior cash returns to its shareholders. Its upstream cash generation has increased with production growing at a 3%-4% CAGR over the last five years. The company is also targeting to generate $5-$10 billion through the sale of its non-core assets in 2018-2020.

The company is expecting its net oil-equivalent production to grow by 4% to 7% in 2019 and 3%-4% CAGR through 2023, on the back of growing demand for its products. Its downstream and chemical business is also poised to grow given strong petrochemical market fundamentals, growing fuel marketing initiatives and demand for renewable fuels.

CVX - Demand Growth
Source: Chevron Investor Presentation

Competition

Chevron possesses a technological edge over its peers, which helps it to better manage its global assets by integrating data and information. The company uses some of the world’s most innovative technology like seismic imaging, chemical fingerprinting to differentiate itself from other players in the industry.

Some of the large energy companies like Royal Dutch Shell, Total SA, ConocoPhillips, ExxonMobil are leading competitors of Chevron. ExxonMobil and Shell are leading integrated energy companies in the world engaging in the exploration, production, and transportation of crude oil and natural gas, whereas ConocoPhillips, is the largest independent E&P company globally, based on production and proved reserves.

Bottom Line

The IEA is projecting global energy demand to increase by nearly 30% by 2040 and Chevron is in a good position to benefit from the rising demand for energy worldwide. The company is known for its safe and affordable energy delivery solutions and its strength across Upstream, Midstream and Downstream businesses. Growth potential across all its business segments, strategic acquisitions and successful completion of large LNG projects should act as growth drivers in the future.

Chevron pays a good yield and I would consider this S&P Dividend Aristocrat a solid income generator in a retirement portfolio but I believe there are better options for a portfolio in the accumulation phase. As you can assess, the dividend should be safe and so is the dividend growth in terms of keeping up with inflation.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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