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Morningstar | Chevron Addresses Long-Term Growth Concerns With Analyst Day

Chevron held its annual analyst day on March 5 and sought to answer questions about its longer-term growth plans by providing guidance through 2023. It announced plans that call for production growth of 3%-4% CAGR through 2023 (including previously announced growth of 4%-7% in 2019) while increasing capital spending to $19 billion-$22 billion per year from 2021 to 2023, from the $18 billion-$20 billion it expects to spend per year through 2020. It already announced a $20 billion capital budget for 2019. Central to its plans is continued growth from its Permian position where it increased its expected volumes to 900 mboed in 2023. Last year, it guided to about 650 mboed in 2022, but continued outperformance and efficiency gains during the last year lead to the increased target. Volumes in 2022 are now expected to be about 800 mboed. In total, Chevron expects to add about 1.5 mmboed of new production by 2023, about half of which will be from the Permian. The remaining volumes will largely come from other shale and tight oil resources (Canada, Argentina, Marcellus) with the remaining from major capital projects including those still in the ramp-up phase.

Meanwhile, management will maintain a focus on shareholder returns with plans to repurchase $4 billion shares this year (on top of the 6% dividend increase in the first quarter) and ultimately direct 40%-45% of operating cash flow to shareholder distributions during the 2019-23 period, assuming $60/bbl Brent. After incorporating the latest guidance into our model, our fair value estimate and moat rating are unchanged.

We think the extension of guidance through 2023 should alleviate some concerns about Chevron’s ability to grow long-term and how it will cope with recent Asia PSC losses (Production guidance includes their impact). The reliance on the Permian for growth does have its drawbacks, however. With a 60/40 liquids/gas split on volumes and discounted realizations for both commodities, Chevron expects its peer leading cash margins to weaken slightly during the next two years before recovering by 2023. While management was quick to emphasize the high returns of its Permian campaign, it means Chevron won’t match the relative improvement in upstream margins registered by many peers. Combined with the increase in capital spending, free cash flow growth will be less as well. That said, while we prefer other integrateds on relative improvement and valuation, we continue to view Chevron as undervalued at current levels.