Morningstar

Chevron Well-Positioned Among Major Integrated Oils

Results revealed progress in cost-cutting that translated into an improvement in upstream earnings, despite a decline in commodity prices.

Securities In This Article
Chevron Corp
(CVX)

As expected, cash flow continued to fall short of covering capital expenditure and dividends for the quarter. While we expect a deficit for the full year, we still anticipate that Chevron will achieve its cash flow neutrality target of $50/barrel next year, with potential for further downside given ongoing cost deflation. Chevron is at an inflection point, with free cash flow set to rise in the coming years. Operating cash flow is set to increase as high-margin volumes from new projects ramp over the next year, resulting in peer-leading growth. Chevron expects production to step up to 2.65-2.70 mmboed in the fourth quarter, thanks in part to new project growth. Meanwhile, capital spending is set to fall to $17 billion-$22 billion from $24 billion this year. Additionally, a low-cost Permian position offers ample running room and opportunity for high return reinvestment that could ultimately result in 350 mboed of production by 2020. This combination of factors makes Chevron one of the best-positioned firms among the major integrated oils. However, we think this is already fully priced into shares.

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About the Author

Allen Good, CFA

Director
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Allen Good, CFA, is a director, Europe, for Morningstar*. Based in Amsterdam, he covers the oil and gas industries as well as manages a team of multi-industry analysts. He is also chair of the Morningstar Research Services Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat ratings issued by Morningstar. In this role, he is responsible for ensuring consistent application of Morningstar’s Economic Moat methodology across sectors and regions as well as updating and revising the methodology. His specialty is global integrated oils such as Exxon, Chevron and Shell and US independent refiners such as Valero and Marathon Petroleum. He also contributes to developing hydrocarbon price and petroleum product margin forecasts used in valuation models.

Before joining Morningstar in 2008, He performed merger and acquisition advisory work for a middle-market investment bank. Before that, he spent several years at Black & Decker in various operational roles, primarily focused on manufacturing and distribution.

Good holds a bachelor’s degree in business from the University of Tennessee and a master’s degree in business administration from Kenan-Flagler Business School at the University of North Carolina. He also holds the Chartered Financial Analyst® designation.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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