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Chevron's Cash Flow Falls Short; No Dividend Concerns

We don't expect a material change our $111 per share fair value estimate.

Chevron CVX reported a loss of $207 million in its third quarter compared with earnings of $2.6 billion the year before. However, both operating segments returned to profitability during the quarter. The upstream segment reported earnings of $235 million compared with $2.7 billion the year before while the downstream segment reported earnings of $292 million compared with $828 million the year before. Both continued to reflect the lower price and margin environment from the pandemic fallout. Production fell 7% to 2.83 million barrels of oil equivalent per day from 3.03 mmboe/d a year earlier largely due to curtailments. Corporate segment losses of $734 million pushed total earnings negative.

Operating cash flow of $3.5 billion was insufficient to cover $1.6 billion in cash capital expenditures and $2.4 billion in dividends, resulting in the net debt/capital ratio rising to 17.5% from 16.8% at the end of the second quarter. It subsequently moved above 20% with the completion of the Noble acquisition.

As the most financially sound integrated oil, Chevron’s dividend remains safe. In addition to relatively low leverage, Chevron further reduced its 2021 spending plans by $14 billion and has achieved $1 billion in operating cost reductions this year, which should benefit its break-even levels. The minimal cash flow shortfall during the quarter implies a break-even just below $50/barrel oil currently. Together these efforts should ensure that the dividend remains safe through next year even if the current environment persists. We plan to incorporate the latest guidance into our model but do not expect a material change to our fair value estimate or narrow moat rating.

This financial strength is largely reflected in the share price as Chevron remains the most expensive integrated oil based on discount to our fair value estimate. That’s relatively speaking, however--it still trades nearly 40% below our fair value estimate while sporting a 7% yield.

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