Chevron: Best-In-Class Production Growth

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We are reaffirming our "buy" rating on Chevron Corp. (CVX); the company’s 1Q21 results were hurt by COVID-19, though we expect these effects to diminish in the coming quarters.

Chevron — the result of the 2001 merger of Chevron and Texaco — also recently completed the acquisition of Noble Energy, which will provide additional diversification and expand its already sizable shale position in the U.S. The acquisition has enabled Chevron to acquire premium assets at bargain-basement prices.

In this volatile energy environment, we believe that a company’s balance sheet strength and placement on the cost curve are critical, and we favor integrated oil companies that are well-positioned to manage a potentially long period of volatile oil prices.

We believe that CVX is one of these companies, as it benefits from best-in-class production growth, industry-low operating costs, and a strong balance sheet.

We also like the company’s strong free cash flow and we believe that the dividend, which yields nearly 5%, is safe and sustainable. On April 28, 2021, Chevron announced a 4% increase in its quarterly dividend to $1.34 per share, or $5.36 annually, beginning with its June 10 payment. The projected yield is about 4.9%.

Chevron has increased its annual payout for 34 straight years. Our revised dividend estimates are $5.31 (raised from $5.20) for 2021 and $5.40 (raised from $5.24) for 2022.We consider the dividend to be safe and sustainable. The shares are trading at 20.2-times our 2021 EPS estimate and at 17.4-times our 2022 forecast, compared to a 10-year annual average range of 13-37.

On other valuation metrics, the shares are trading near the high end of the range for price/book (1.6 versus a range of 1.2-1.7), and above the high end of the range for price/sales (2.2 versus a range of 1.1-1.7), and price/cash flow (20.7 versus a range of 7.0-12.1). They are also trading at a price/EBITDA multiple of 26.6, above the high end of the range of 6.8-11.5.

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