Chevron's Earnings Deteriorate but Outlook Improved

Chevron CVX reported a loss of $665 million during the fourth quarter compared with a loss of $6.6 billion the year before, which included $10.4 billion in impairments. Earnings worsened from a loss of $207 million in the third quarter as downstream and corporate segment losses increased and offset higher profits from the upstream segment.

Full-year operating cash flow of $10.6 billion and asset sale proceeds of $3.0 billion were insufficient to cover $9.9 billion in cash capital expenditures and loans and $9.7 billion in dividends. The shortfall along with assumption of Noble debt resulted in the net debt/capital ratio rising to 23% from 13% at the end of 2019. This is still within management's targeted range and the lowest of the peer group.

Our fair value estimate and narrow moat rating are unchanged. Although earnings deteriorated during the fourth quarter, we expect an improved macroeconomic environment in 2021, which should lift commodity prices and margins as vaccines are distributed and the pandemic recedes. Meanwhile, Chevron’s dividend remains safe, in our view, with relatively low leverage levels, an improved cost structure, and the likelihood of improving cash flow. During 2020, Chevron achieved more than $1 billion in operating expense reductions and reduced capital spending by 35% compared with 2019. Both should hold in 2021, with capital spending remaining flat at about $14 billion and between $14 billion and $16 billion through 2024. On the basis of these plans, we project Chevron’s break-even level to be below $50/barrel in 2021, which is below current forward prices. As such, the 20% discount to our fair value estimate and 6% yield indicate value, in our view. Further updates on long-term plans and carbon-reduction strategies should come in early March at the company’s annual analyst day.

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