Morningstar

Chevron’s Cash Flow Rebounds on Higher Oil Prices

Our fair value estimate and narrow moat rating are unchanged.

Securities In This Article
Chevron Corp
(CVX)

Chevron CVX capitalized on a recovery in oil prices, improved capital efficiency, and cost reductions to deliver a strong earnings and cash flow recovery during the second quarter. Adjusted earnings for the quarter were $3.3 billion compared with a loss of $2.9 billion the year before. Operating cash flow through the first half of the year increased to $11.2 billion from $4.8 billion last year, while free cash flow excluding working capital surged to $8.7 billion from zero the year before. Total debt fell during the quarter to $43.0 billion, implying a net debt ratio of 21.0%. Considering the cash flow improvement and stronger balance sheet, management reinstated its annual buyback at $2 billion-$3 billion, an amount it believes is sustainable given the company’s performance and commodity price outlook. Earlier this year it increased the dividend by 4%.

Our fair value estimate and narrow moat rating are unchanged. While there are other integrated oils trading at bigger discounts, valuation is not the only consideration when investing in the group. Incorporating asset quality, management discipline, financial health, and oil leverage, it’s hard to overlook Chevron. Also, while higher cash yields can be found in the sector, Chevron’s remains the safest and most likely to grow over time.

The company continues to make progress on its cost-improvement efforts, fully integrating Noble, and achieving greater than the targeted $600 million in synergies earlier than expected. It also remains on track to deliver its previous guidance for a 10% reduction in operating expenses from 2019 levels. Meanwhile, it reduced its capital spending guidance for the year by $1 billion, in part on greater efficiency across the portfolio.

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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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