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Chevron Rides Higher Prices to Record Free Cash Flow

Our fair value estimate and narrow-moat rating are unchanged.

Chevron CVX showed its oil leverage in the third quarter as earnings soared to $6.1 billion from a loss of $207 million the year before while Brent oil prices only increased 71%. It also posted record quarterly free cash flow demonstrating its improved operations and capital discipline.

Thanks to higher prices and volumes and asset sales gains upstream earnings increased to $5.1 billion from $235 million a year ago. Production volumes increased 7% to 3,034/mmboed largely thanks to the addition of Noble volumes. Downstream earnings increased to $1.3 billion from $292 million on higher margins, foreign exchange effects, and higher chemical earnings.

Operating cash flow excluding working capital of $9.0 billion covered capital spending and dividends. During the quarter, Chevron reduced debt by $5.6 billion and repurchased $625 million in shares. Guidance for fourth-quarter repurchases is at the upper end of its $500 million-$750 million range. The annual guidance for repurchases of $2 billion-$3 billion could be revised upward if debt continues to fall, but management will be circumspect with increases as it aims to maintain repurchases through the cycle. It also reduced 2021 capital spending guidance to $12 billion-$13 billion from $13 billion on project deferrals and greater efficiency. Guidance for 2022-25 of $15 billion-$17 billion was unchanged.

We expect Chevron to continue delivering stellar results as commodity prices reman high, while it could see further improvement if international refining margins improve, although its exposure is less than peers. That said, we think its strong balance sheet and potential for continued strong earnings and shareholder returns is largely priced in shares. Although we think one could buy Chevron and feel comfortable given management’s track record and asset quality, we see more value elsewhere in the sector. Our fair value estimate and narrow-moat rating are unchanged.

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