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Morningstar | Chevron Demonstrates Portfolio Strength With Results and Share-Repurchase Program

Chevron reported strong growth in earnings and cash flow in the second quarter, as its portfolio was well positioned to capture the benefit of higher oil prices. Earnings increased to $3.4 billion from $1.5 billion the year before on an increase in upstream earnings to $3.3 billion from $853 million last year, thanks to higher oil and gas prices, as well as an 2% increase in volumes. Through the first half of the year, production has increased 4.5%, excluding the impact of asset sales, in line with full-year guidance of 4%-7%. Given the company’s success in the Permian (production of 270 thousand barrels of oil equivalent per day, compared with 92 mboed last year), where it is outpacing expectations and the successful status of Wheatstone Train 2, management updated guidance to the upper end of that range. Downstream earnings fell to $838 million from $1.2 billion last year on weaker international margins.

For the first half of the year, cash flow has increased to $11.9 billion compared with $8.7 billion in the year-ago period. Management also reiterated guidance for cash flow headwinds of $2.5 billion-$3.5 billion for the full year, owing in part to equity distributions less than earnings, which should depress cash flow. However, demonstrating the business' long-term cash-flow-generation ability, Chevron reinstituted a share-repurchase program of $3 billion per year, which it views as sustainable even at lower oil prices. The strong cash flow generation, focus on shareholder returns including dividend growth, and growing liquids portfolio, including an advantaged Permian position, continue to make Chevron one of the more compelling integrateds. However, we view shares as fully valued at present. Our fair value estimate and narrow moat rating are unchanged.