Can Chevron Churn Profits across the Oil Price Cycle?

Oil major Chevron (CVX) has been facing volatile crude oil prices recently. Due to softer energy prices this year, its upstream realizations and earnings have weakened, affecting its overall profits. Chevron stock has fallen 0.6% quarter-to-date driven by lower third-quarter earnings.

To overcome the situation, Chevron is focusing on high-grading its portfolio. It aims to be profitable across all points in the oil price cycle. The company plans to create competitive upstream and downstream asset bases via a mix of capex and divestment.

Chevron plans to optimize its capex by investing in projects that are profitable even in a lower oil price scenario. It’s looking at projects that can provide more and faster returns with relatively low investment. At the same time, it also plans to divest assets that don’t fit its core focus area.

Chevron’s capex in 2020

In the next year, Chevron plans to spend about $20 billion in capex—almost the same as its current year’s estimated capex. In the first nine months, Chevron incurred $15 billion in capex. Chevron plans to spend most of the next year’s capex on the upstream segment. It also wants to focus on shorter-period projects, which help raise profits and free cash flows.

Chevron plans to spend $16.8 billion on the upstream segment in 2020. The company plans to spend $11 billion on the sustenance and growth of producing assets, $5 billion on capital projects that are in progress, and about $1 billion on global exploration. CVX plans to focus on the Permian Basin and the Future Growth Project and Wellhead Pressure Management Project at Tengiz, Kazakhstan.

Chevron’s tough stance

Chevron is getting prepared for a long-term low-energy-price outlook. It’s planning to reduce its investment in gas-related projects such as Kitimat LNG (liquefied natural gas) and the Appalachian shale. Chevron is also looking at divestment as one of its strategic alternatives for these projects.

With a weaker outlook, the Big Foot project has faced impairment. Chevron expects an impairment charge of about $10 billion–$11 billion in the fourth quarter, half of which will go toward the Appalachian shale.

Chevron’s chair and CEO, Michael Wirth, said, “We believe the best use of our capital is investing in our most advantaged assets. With capital discipline and a conservative outlook comes the responsibility to make the tough choices necessary to deliver higher cash returns to our shareholders over the long term.”

The way forward

Chevron is bracing itself for harsh business conditions. The company, which saw record growth in its upstream output in 2019, could see weak growth in the years to come. Additionally, lower crude oil and natural gas prices will likely affect its earnings.

Wall Street analysts expect the company’s earnings growth to be weak in 2020. They expect its EPS to rise 8% in the year, the lowest among its peers. Analysts expect oil companies ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and BP (BP) to see EPS rises of 41%, 20%, and 15%, respectively, in the next year. They also expect Total’s (TOT) EPS to increase by 13% in 2020.

Chevron is facing a weak earnings outlook for 2020, so it’s no surprise it’s making some tough decisions to maintain its financial strength and flexibility. The company has clear cash priorities, which include dividends, capex, debt repayment, and buybacks. These priorities will assume more importance in a difficult energy environment, which the company is preparing for.

To learn more about Chevron’s debt and cash flows, read BP versus Chevron: Who Has More Financial Power?