Anyone else notice Chevron held up better than most of its rivals in 2020? Well, it’s mainly because it came into the year focused on keeping its debt in check and cutting costs. When the pandy hit, Chevron didn’t face the kind of pressure to cut its dividend that companies like BP and Royal Dutch Shell faced.
That isn’t to say that Chevron [$CVX] got out unscathed. The company burned $5.5 billion in 2020 and announced thousands of layoffs. Chevron’s investor day on Tuesday pointed to more-profitable times ahead, as Truist analyst Neal Dingmann dubbed it “one of their most investor friendly strategic plans yet.”
In particular, analysts were surprised that Chevron will be able to boost production even after spending much less than it had predicted a year ago. “Now, despite a 30% reduction in capital spending, management still expects similar production growth to the pre-Covid outlook from last year’s meeting,” wrote Morgan Stanley analyst Devin McDermott. The plan that Chevron presented should be held up even at Brent crude prices of $40, he said.
Among other developments, Chevron said on Tuesday that it can cut operating costs by $600 million after closing its deal for Noble Energy. That’s double the amount of savings that the company had anticipated.
Investors have shown a preference for oil companies that can preserve cash over those that may be growing quickly but are spending heavily. McDermott believes that Chevron can generate $21 billion in free cash flow with Brent at $64, well ahead of Wall Street consensus expectations for $15 billion.
The company’s dividend costs it about $10 billion a year. If its free cash flow can come in at double that level, Chevron could elevate the dividend or buy back shares, both of which would likely lift the stock. Still, Chevron already trades at 25 times this year’s expected earnings and 19 times 2022 earnings. That may be giving some analysts pause.