Dividend Hike is a Commitment, says Chevron Corp’s New CEO

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Dividend Hike is a Commitment, says Chevron Corp’s New CEO

Oil production in the US witnessed a 47-year high when it topped 10 million barrels a day in November 2017. With the national oil production on the upside of its performance, Michael Wirth, Chevron Corp’s (NYSE: CVX) new CEO, recently mentioned in an interview that he is seeing “great gains” in its shale business.

On January 31, 2018, Chevron announced an increase of 3.7% in its dividend. The current dividend stands at $1.12 (from $1.08), with a yield of 3.95% and marks the 32nd consecutive year of annual dividend growth. In the last decade, Chevron has seen an annual dividend growth of 7%; and in its recent Shareholders meeting, the management emphasized that dividend would be its topmost priority.

Wirth, who assumed the role of the Chairman and CEO on February 1, 2018, shared with investors their plans to leverage three great strengths: an advantaged portfolio (with highly competitive upstream and high return downstream operations), a strong balance sheet and a deep resource position (increased to 11bn barrels).

In its recent 2018 Security Analyst Meeting held on March 6, 2018, Chevron reiterated its intention to lower their cost structure, invest in high yield projects and optimize the value chain. Shareholders are set to gain due to the increase in the free cash flow. Investors have lauded Chevron’s position in the Permian basin where they have increased their position from 2m to 2.2m acres.

Source: Chevron Q4 2017 Earnings Release

Terming 2017 as a successful year, Chevron posted a Q4 2017 earnings of $3.1bn ($415m in Q4 2016) with a cash flow of $6.2bn and full-year earnings of $9.2bn (loss of 497m in 2016) with a cash flow of $20.5bn. Due to the tax reform, they incurred a one-time charge of $190m and a non-cash provisional gain of $2bn. The diluted EPS for Q4 was $1.64. Chevron has initiated better work processes which have led to a cost reduction of 40% in upstream production costs per barrel and 20% in operating expenses (since 2014).

Source: Google Finance

The greatest drop in Chevron’s stock price was in 2014-15 when stocks plummeted by 40% due to the spike in oil prices. As profits increased, the stocks came back to the level of $133 set in 2014. However, in the early part of 2018, stocks slid back 11% before the Q4 2017 release and 7% more after results were out.

On another note, the Q4 2017 earnings of $3.1bn also include tax benefits of $2.02bn. The EPS of $0.72 (after excluding the tax benefits) fell short of the analysts’ estimates of $1.22 per share. The earnings from international operations were also down to $84m in Q4 2017 from $357m in Q4 2016 due to lower margins on product sales. Chevron stock slid 10% after its Q4 2017 earnings release.

In terms of its footing in the oil industry, Chevron has a better YTD compared to Exxon and is growing production much faster and has a relatively safer balance sheet. Exxon’s long-term debt ($24bn) has grown by 250% since 2013, whereas Chevron’s debt ($33bn) has grown by 67% during the same time period; thus placing Chevron as a safe bet for investors. Even though it may not be the best time for a prospective investor to enter into Chevron stock, existing shareholders who feel that it will trade below its current price can analyze the fundamentals and decide to sell high and buy back when it reaches its real value.

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