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Energy giant Chevron raised its dividend and announced a new stock-buyback plan this week.
David Paul Morris/Bloomberg
Chevron
capped off a record year for earnings with a disappointing fourth-quarter report, pushing shares down 3% in early trading.
The oil major said it earned $4.09 per share in the last three months of the year, after adjustments, versus analysts’ expectations for $4.33.
After its stock rose 53% last year, Chevron now faces a higher hurdle to keep the momentum going. Its earnings are expected to fall this year to about $15.95 per share from $18.83 in 2022.
Jefferies analyst Lloyd Byrne blamed lower-than-expected earnings from U.S. and international production and U.S. refining for the miss. In the U.S., the company’s volumes came in lighter than expected, he wrote.
One reason for the miss may have been that the company’s exploration expenses were higher than analysts had expected, said Chevron CFO Pierre Breber in an interview. Breber noted that the company’s last two quarterly earnings results were more than 10% higher than Wall Street had expected, suggesting that analysts overcorrected in the other direction in the latest quarter.
The company’s expectations for how much oil and gas it will produce next year also fell short of expectations by about 2%, according to Truist analyst Neal Dingmann.
Friday’s earnings disappointment comes after a string of good news for the stock. Chevron (ticker: CVX) delighted investors late on Wednesday by announcing an increase to its dividend, and a new plan to repurchase $75 billion worth of shares.
The move to reward shareholders angered the White House, however. A spokesman criticized Chevron for spending so much on shareholders when President Joe Biden has been urging oil companies to drill more in order to increase supplies and force oil prices lower.
It was indicative of the challenge Chevron now faces in pleasing different constituencies.
The White House may be Chevron’s most vocal critic, but the government poses little threat to the company, particularly given that Republicans control the House of Representatives. The bigger challenge for Chevron is convincing investors that it can withstand the traditional boom-bust cycle that has plagued oil companies for decades. Oil and natural-gas prices have dropped to about $80 from their 2022 highs above $120. Buying back 22% of its market cap could lift shares, but not if Chevron is accelerating buybacks just as the oil market peaks.
Breber said he’s confident that the company isn’t overpaying for its shares, even though the stock recently hit record highs. “Our track record on buybacks is very good,” he said. Breber added that energy stocks still make up just 5% of the S&P 500’s market cap, despite accounting for at least 10% of the index’s earnings.
“So we think there’s still upside,” he said. “We’ve been working hard to win back investors with our message of higher returns, lower carbon, having capital discipline in both our traditional and new energy businesses and having a clear strategy on how we sustain higher returns in a lower-carbon future.”
For the stock to rise from here, Chevron will have to attract new investors willing to give the company’s stock a higher valuation. Its dividend may do the trick for some people. Chevron’s stock now yields 3.4%, better than the
S&P 500
‘s average 2% yield and the energy sector’s 3%. Chevron may also have to accelerate some of its new energy investments into areas like biofuels and hydrogen to show investors it is ready for the energy transition.
Chevron was a clear leader among oil and gas companies early in the pandemic, because its balance sheet was healthier than nearly all its competitors. Unlike some European counterparts, Chevron didn’t have to cut its dividend. In fact, the company has raised it for 36 straight years.
But in the past year, Chevron has lagged behind some other companies, including its top competitor
Exxon Mobil
(XOM). Exxon is investing more heavily in oil and gas projects, as well as putting a larger portion of its capital budget toward clean energy efforts. While analysts are still generally bullish on Chevron—half of them rate the stock at Buy—their average target prices are just 4% below the company’s current price.
Chevron is investing heavily in the Permian Basin in the U.S., and expects to grow production there for years. It’s also focused overseas. Just this month, the company said it had discovered “significant” natural gas off the coast of Egypt. Chevron also produces gas off the coast of Israel.
If the company can become an even bigger supplier of natural gas when Europe is looking for new sources, it could give investors another reason to buy in.
Write to Avi Salzman at avi.salzman@barrons.com
