VALUATION HIGHLIGHTS
- Downstream constitutes 69% of the Trefis price estimate for Chevron's stock.
- Upstream constitutes 21% of the Trefis price estimate for Chevron's stock.
WHAT HAS CHANGED?
Chevron Q4 2024 Snapshot
Chevron reported fourth-quarter earnings below Wall Street estimates as weak margins dragged its refining business into a loss for the first time since 2020. The second-largest U.S. oil producer posted adjusted earnings per share of $2.06, below Wall Street’s $2.11 estimate. Chevron’s downstream business lost $248 million in the fourth quarter of 2024, compared with a profit of $1.15 billion in the same period a year ago. Profit from the company’s oil and gas exploration and production unit rose to $4.3 billion from $1.59 billion a year ago when the figure included charges.
Looking Ahead
The company is targeting $2 billion to $3 billion in cost reductions from 2024 through the end of 2026. Chevron expects its global output to grow 6% to 8% this year, and 3% to 6% in 2026, assuming Brent crude oil prices of around $70 a barrel. Future growth will come partly from the Gulf of America, as the company described the ocean basin known internationally as the Gulf of Mexico. Chevron also pledged to continue buying back $10 billion to $20 billion of its shares each year, depending on market conditions. The company hiked its quarterly dividend 5% to $1.71 per share and reaffirmed expectations of adding $10 billion in free cash flow over the next two years.
Uncertainty over Hess Acquisition
Chevron remains locked in a bitter arbitration battle with Exxon over its proposed $53-billion takeover of Hess, which owns a 30% stake in Exxon’s Guyana holdings. Previous discussions to attempt to settle the dispute have ended and Chevron is focused on the arbitration.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Chevron's value that present opportunities for an upside or downside to the current Trefis price estimate for Chevron:
Crude Oil and Natural Gas Liquid (NGL) Production
- Average Liquids Price Realization:The realized price increased sharply to $93/bbl in 2022, before falling to $74/bbl in 2023 and $73/bbl in 2024.
Crude oil prices fluctuated between $70/bbl and $90/bbl in 2024. Sluggish demand and relatively high supply outside of the OPEC+ countries contributed to the relatively narrow trading range for crude oil despite geopolitical tensions in the Middle East and shipping disruptions in the Red Sea. Several extensions of OPEC+ production cuts also helped keep prices from falling below this range. Weakening global economic growth contributed to downward pressure on the price of Brent. Slowing economic activity and reduced fuel demand in China limited upward price momentum.
Since the supply-demand dynamics remain balanced, prices continue to be steady. Meanwhile, a volatile US dollar, efforts taken by the Chinese government to boost their economy, easing geopolitical conflicts, and changes in production policies of key producers would influence prices in the coming months.
If oil prices sustain at $96/bbl by the end of forecast period, there is a 5% upside to the current estimate.
- Crude Oil and Total Liquids Produced: The figure stood at 1.16 million barrels of oil equivalent per day (boed) in 2022. This metric grew slightly to $1.21 million boed in 2023 before rising further to 1.27 million boed in 2024.
The growth in production levels are attributable to the full-year of legacy PDC Energy, Inc. (PDC) production and growth in the Permian Basin. That said, lower production has a downside risk on cash flows and margins. If oil production declines to 760 million boed, there is a 5% downside to the current estimate.
BUSINESS SUMMARY
Chevron Corporation is the second-largest energy company in the U.S., after Exxon Mobil. The company manages its investments in subsidiaries and affiliates and provides administrative, financial, management, and technology support to the U.S. and international subsidiaries that engage in fully integrated petroleum, chemicals, and mining operations, as well as power generation and energy services.
Chevron has operations in 180 countries along with a strong network of retail gas stations under the Chevron, Texaco, and Caltex brands. The company is also involved in pursuing alternative energy solutions.
SOURCES OF VALUE
Crude Oil and Natural Gas Liquids production is by far the most valuable segment for Chevron for the following reasons:
Higher profitability compared to downstream activities like refining
Although the revenues attributed to crude oil and NGL production are less when compared to downstream businesses like refined product sales, the profitability is much higher.
In 2024, the company's average selling price for crude oil was around $73 per barrel while average production costs were around $9 per barrel. The EBITDA margins for crude oil and NGL production are usually higher than the EBITDA margin for refined product sales due to the fact that the cost of production per barrel is quite low for crude oil compared to its selling price.
KEY TRENDS
Improvements in technology
Due to limited underlying growth in product demand, there has been a movement in recent years toward increasing the complexity of refineries rather than expanding capacity. In the U.S., no new refineries have been built since 1980, however, improvements in process design and technology have seen capacity increase by around 1% per year.
The early refineries that were established were mainly used to process light sweet crude resulting in an increase in demand for light sweet crude. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, interest in the development of new cost-effective methods for extracting and transporting heavy crude oil, for refining into valuable light and middle distillate fuels, is also increasing.
Record Permian Output
Production from the Permian Basin of Texas and New Mexico grew 14% year-over-year to a record 992,000 boepd in Q4 2024. The asset is comprised of stacked formations enabling production from multiple geologic zones from single surface locations, staging the development for optimized capacity utilization of facilities and infrastructure. As one of the largest producers in the Permian Basin, Chevron continues to develop its advantaged portfolio of 1,780,000 net acres in the Delaware and Midland basins in west Texas and southeast New Mexico and is expected to achieve one million barrels of net oil-equivalent production per day in 2025.
