To The Moon

$Chevron(CVX)$

In this analysis, we'll take a quick look at Chevron’s business, review some of its key financial metrics, discuss recent updates, and attempt to determine a fair value for the stock to assess whether it's a good buy today.

Chevron's Business Segments

Chevron operates in two primary business segments:

• Upstream: Involves oil and gas exploration, extraction, and production.

• Downstream: Focuses on refining crude oil, producing petrochemicals, and selling end products to consumers.

While Chevron's downstream business generates more revenue, its upstream segment is slightly more profitable. This balance between revenue and profit should be kept in mind as we analyze the company's financials.

Earning Overview

In the fourth quarter of 2024, Chevron Corporation reported adjusted earnings of $3.6 billion, with cash flow from operations totaling $8.7 billion. The company's net oil-equivalent production reached 3,350 thousand barrels of oil equivalent per day (MBOED). Despite a 40% year-over-year decline in earnings per share (EPS) to $2.06, Chevron's sales increased by 10.7% to $52.23 billion. The company also achieved record production levels, particularly in the Permian Basin, with output surpassing 1 million barrels per day in December 2024. Looking ahead, Chevron plans to reduce its global workforce by 15% to 20% by the end of 2026, aiming to cut operating costs by $2 billion to $3 billion. This restructuring coincides with the company's $53 billion acquisition of Hess Corporation, expected to close by mid-2025.

Hess Acquisition (Ticker: HES)

In 2023, Chevron announced its acquisition of Hess Corporation, a deal that is progressing through regulatory approvals. The acquisition is expected to be finalized by mid-2025. This could impact Chevron’s financials and profitability, which we’ll revisit later in this analysis.

Revenue Trends & Commodity Prices

Chevron’s revenue has generally trended higher, but it is subject to significant volatility. This is largely driven by fluctuations in oil and gas prices.

By overlaying crude oil prices with Chevron’s revenue, we see a clear correlation—when oil prices rise, Chevron’s revenue follows suit, and vice versa. This dependence on commodity prices plays a major role in the company’s financial performance.

Chevron Corporation has experienced notable fluctuations in its revenue over the past decade, largely influenced by global oil market dynamics. In 2023, the company reported operating revenue of $196.91 billion, reflecting a decline from the previous year.

In the fourth quarter of 2024, Chevron's revenue increased by 10.7% year-over-year, reaching $52.226 billion. This growth was primarily driven by improved upstream earnings, which rose to $1.42 billion from a prior loss, offsetting challenges in the downstream segment, which reported a loss of $348 million due to lower refined product margins and higher operating costs.

Despite these gains, Chevron's net income for the twelve months ending December 31, 2024, was $17.661 billion, marking a 17.35% decline compared to the previous year. This decrease in profitability underscores the company's exposure to volatile commodity prices and market conditions.

In response to these challenges, Chevron announced plans to reduce its global workforce by 15% to 20% by the end of 2026, aiming to cut operating costs by $2 billion to $3 billion. This restructuring aligns with the company's strategic acquisition of Hess Corporation for $53 billion, expected to close by mid-2025. Overall, while Chevron has demonstrated resilience through revenue growth in certain segments, it continues to navigate profitability challenges amid fluctuating market conditions.

Profitability & Margins

Analyzing Chevron’s income statement, we see that its profit margin stands at 8.7%, which aligns with its long-term average.

Examining Hess’s financials, we find that Hess has maintained higher-than-average profit margins in recent years. If the merger proceeds as expected, it could potentially enhance Chevron’s overall profitability—a positive sign for investors.

Revenue & Free Cash Flow Forecasts

Looking at analyst estimates for Chevron’s revenue over the next few years, projections suggest relatively flat growth. Free cash flow (FCF) is crucial for valuation purposes, particularly when using discounted cash flow (DCF) models. Analyst estimates for free cash flow indicate a gradual upward trend, albeit at a modest pace.

Using these projections, a DCF model values Chevron at over $200 per share, compared to its current market price of approximately $150 per share. This suggests the stock may be undervalued.

However, given the inherent volatility in commodity prices, it’s wise to supplement this analysis with alternative valuation metrics.

Valuation Using Price-to-Earnings (P/E) Ratio

Chevron’s P/E ratio compared to the integrated oil and gas industry average shows that it has been trading at a slight premium.

When compared to its own 5-year, 10-year, and 20-year historical P/E averages, the stock appears somewhat overvalued to fairly valued, depending on the timeframe considered.

Dividend History & Stability

Chevron has a strong track record of increasing dividends over the past two decades, with the only notable pause occurring in 2015. At that time, free cash flow was insufficient to cover dividend payouts, making the temporary pause reasonable.

Overall, the company has demonstrated prudent capital allocation and a commitment to returning value to shareholders.

Bull & Bear Case for Chevron Stock

Bullish Arguments: Undervalued based on DCF analysis, suggesting upside potential. Expansion projects, such as the Tengiz oil field in Kazakhstan, offer long-term growth opportunities. Reliable dividend payments, backed by solid financial management. Hess acquisition, if completed, could enhance profitability and shareholder value.

Bearish Arguments: Volatility in earnings due to fluctuating commodity prices. Geopolitical risks, particularly regarding Chevron’s reliance on oil transport through Russian-controlled regions. Concerns over long-term energy sector stability, as oil and gas companies face challenges in maintaining consistent profitability.

Conclusion

Chevron is a well-established and efficient energy company with strong financials, a reliable dividend, and growth potential through acquisitions and expansion projects. However, investors should be aware of risks associated with commodity price volatility and geopolitical factors.

For those looking to invest in an integrated oil and gas company with a solid dividend and long-term potential, Chevron remains a compelling option.

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.