uploads/2016/12/Cashflow-3.jpg

What Is Chevron’s Cash Flow Strategy?

By

Updated

Chevron’s cash flow

In the first nine months of 2016, CVX’s cash flow from operations stood at $8.9 billion, falling from $14.9 billion in the first nine months of 2015. 

CVX’s cash outflow from investing stood at $13.9 billion in the first nine months of 2016, compared to $16.6 billion in the first nine months of 2015. However, its cash flows from financing stayed positive year-over-year, with $1.3 billion worth of inflows in the first nine months of 2016.

Article continues below advertisement

Chevron’s cash flow from financing activities mainly consisted of changing debt levels, dividend payments, and share buybacks until 2014. Chevron prioritizes dividend payments to its shareholders. CVX’s current dividend yield stands at 3.7%. Its peer ExxonMobil’s (XOM) dividend yield stands at 3.4%. Comparatively, BP (BP) and Royal Dutch Shell (RDS.A) have high dividend yields of 6.5% and 6.9%, respectively.

If you’re looking for exposure to high dividend stocks, you can consider the Vanguard High Dividend Yield ETF (VYM). The ETF also has ~10% exposure to energy sector stocks, including XOM and CVX.

Analyzing Chevron’s cash flow strategy

In the first nine months of 2016, Chevron generated $8.9 billion in cash from operations, but it had cash outflows of $14.1 billion in the form of capital expenditure and $6 billion in the form of dividends, amounting to a total of $20.1 billion.

So, how did the company make up for the difference of $11.2 billion in cash flow? Broadly, due to lower cash flow from operations, the company had to resort to fresh debt, divestments, and the utilization of its cash reserves.

Article continues below advertisement

Chevron’s cash proceeds from its asset sales stood at $2.2 billion in the first nine months of 2016. In the same period, it incurred $6.9 billion in additional debt. The remaining shortfall was mainly funded by drawing down its cash reserves. Chevron’s cash balance fell 43% year-over-year to $7.4 billion in the first nine months of 2016.

For how long will this strategy continue?

Chevron is likely to see an alteration in its cash flow plan on an improving oil price environment. Oil prices are spiking due to the efforts of oil producers to reduce the global supply glut. For more on this, read How Non-OPEC Production Cuts Could Drive Oil Rally.

With spiking oil prices and major projects coming online, higher production from a robust upstream portfolio should result in enhanced revenue and earnings for CVX, leading to better cash flow from operations.

Thus, going forward, oil prices will be key to Chevron’s liquidity position. For more on oil prices, read Crude Oil Makes New 2016 Highs: Following Oil-Weighted Stocks.

Advertisement

More From Market Realist