Chevron is working hard on all fronts to boost its profitability and cash returns.
Chevron (CVX 2.86%) has grown into one of the world’s biggest energy companies over the decades. It spends billions of dollars each year to expand its operations organically and through acquisitions. Those investments to grow its business also increase its profitability and cash flow.
However, Chevron doesn’t just want to grow bigger; it wants to get better. It does that through its capital recycling program and initiatives to reduce its structural costs. It’s taking several steps to get bigger and better in the future, which should put it in an even stronger position to grow shareholder value.
Continuing to grow bigger
Chevron recently reported solid third-quarter results. The oil giant grew its global production by 7% year over year in the period to nearly 3.4 million barrels of oil equivalent per day (BOE/d). Fueling that growth was its record production volumes in the Permian Basin and the acquisition of PDC Energy.
The company’s production should continue rising in the future. It recently started up key projects in the Anchor, Jack/St. Malo, and Tahiti Fields in the Gulf of Mexico, which will supply incremental production. Meanwhile, it has additional projects in the Gulf on track to start up next year. That drives the company’s view that it can increase its output in the region by 300,000 BOE/d by 2025. Chevron is also investing to expand its operations in the Permian, Kazakhstan, and elsewhere, which will help fuel production growth through at least 2027.
Meanwhile, the company is working on an even more impactful growth driver in its pending acquisition of Hess. The deal would add complementary positions in the Gulf of Mexico and Southeast Asia while adding assets in the Bakken and offshore Guyana to its portfolio. Closing its Hess deal would extend Chevron’s production growth outlook into the 2030s, fueled by the growth ahead in Guyana. Meanwhile, it would more than double the company’s free cash flow by 2027, assuming oil averages $70 a barrel, right around the recent level.
Striving to get better
Chevron’s investments to grow bigger should make it a better oil company in the future because it’s investing heavily to expand its highest margin production. That drives the company’s view that it will increase its return on capital employed and grow its free cash flow.
However, the company is also taking several other steps to become an even better company. One way it’s doing that is by optimizing its portfolio. Chevron is selling non-core and lower-margin assets to strengthen its balance sheet and recycle the proceeds to grow its higher-margin assets. For example, the company agreed to sell its assets in Canada to Canadian Natural Resources last month in a $6.5 billion deal. Those operations have lower margins and are more carbon-intensive, making them a less-than-ideal fit for Chevron. The company also expects to close asset sales in the Congo and Alaska in the fourth quarter. These sales are part of its plans to divest $10 billion-$15 billion of assets through 2028 to further fortify its financial position.
Chevron is also taking steps to optimize its cost structure. The company has cost-cutting efforts currently underway that will target $2 billion to $3 billion of structural cost reductions by the end of 2026.
These moves should enable Chevron to become an even more profitable energy company. It delivered strong profitability in the third quarter, with $4.5 billion of earnings and $9.7 billion of cash from operations. That strong cash flow enabled the company to continue returning a meaningful amount of money to its shareholders. It returned a record $7.7 billion of cash to investors during the third quarter, paying about $2.9 billion in dividends and repurchasing roughly $4.7 billion of stock. Even with its robust cash returns, Chevron ended the quarter with a strong balance sheet. It had nearly $4.7 billion of cash and a low 11.9% leverage ratio, well below its 20%-25% target range.
A top oil stock
Chevron is already a great oil company. It’s very profitable, which is enabling it to return lots of cash to its shareholders. However, it’s not resting on its laurels. It’s working to grow bigger and better, which should make it even more profitable in the future and allow it to continue returning lots of cash to its shareholders. That makes it a great long-term investment in the oil patch.
Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.
