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Stock Analyst Update

Chevron’s Cash Flow Rebounds on Higher Oil Prices

Our fair value estimate and narrow moat rating are unchanged.


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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Allen Good does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.