It hasn’t exactly been smooth sailing for the energy patch these days. Persistently low oil prices have made fools of us all, impacting profits, cash flows and dividends at a variety of energy firms. After all, if you rely on a high commodity price to make your money, any drops to that price will seriously impact your bottom line.
And that drop in oil isn’t just affecting the small fries — even the biggest energy firms on the block are hurting. A prime example of that has been Chevron Corporation (CVX).
While CVX isn’t in danger of going the way of the dodo or filing for bankruptcy, the oil price rout could potentially do something more sinister for investors — result in a cut to the juicy dividend Chevron stock throws off.
Chevron hasn’t pledged to do so, but recent dour earnings, cuts at rivals and a few recent asset sales may have the energy giant seriously looking at its nearly 5% dividend yield.
It’s something investors need to think about when considering the integrated major for their portfolio.
Chevron Stock: A Ton of Negatives
Companies sell assets all the time (especially energy stocks) when a field no longer fits their plans or they’ve decided to completely exit a locale or country. Chevron has been no different over its history. The recent pace of sales and the kind of legacy assets that’s it’s put up on the auction block, however, have been a little troubling.
The latest of which has been the firm’s geothermal assets in Indonesia and the Philippines. At first blush, you may be thinking “who cares?” The truth is, these are actually big assets. Chevron has been active in geothermal since the 1980s and in Indonesia, CVX’s two fields — the Darajat and Salak — have a combined operating capacity of 647 megawatts. That makes them the largest geothermal operations in the world. This isn’t CVX selling off some Podunk field in the middle of nowhere; The sale of these assets should fetch north of $3 billion.
This follows recent sales of its shallow water Gulf of Mexico assets and a huge stake in its Moroccan deepwater leases/operations. Again, these aren’t small time stakes and are all part of Chevron’s plan to sell more than $10 billion worth of assets this year.
The every growing rummage sale comes at a time when CVX’s cash flows continue to dry up during the oil rout.
Over the last few years, that number has been negative. Now some of that has been because of large scale projects like its Gorgon LNG sucking capital expenditures. But more recently, that negative number has come from dwindling oil prices. The Gorgon is done and ready to ship.
Chevron Corporation’s latest earnings highlights the current struggle.
CVX’s upstream segment reported a huge loss of $1.95 billion. This compares to a profit of $432 million in the fourth quarter of 2014. For the entire year, CVX managed to lose nearly $4 billion in its U.S. upstream segment. Cash flows from operations across all segments were basically halved.
Why CVX’s Dividend May Be in Danger
Remember, cash flows from operations are different than free cash flows. FCF is the “extra” cash businesses throw off after all the spending is taken out. Free cash flows are the things that pay dividends and fund lucrative buyback operations. CVX doesn’t have them, but Chevron stock does pay that lucrative dividend.
It does that by spending down cash and working capital as well as upping its debt load by a lot. Selling what you have and borrowing money isn’t a sustainable dividend strategy over the long haul. Just look at Chevron stock’s payout ratio. A whopping 175%. A safe dividend usually comes with a payout ratio of 60% or less. That high ratio looks even less safe when considering that CVX is outspending cash flows just to keep production going.
What’s troubling now is that CVX is tapping into some its quality assets to keep the spigot flowing. The geothermal unit does actually produce real steady earnings for Chevron. As does the shallow Gulf of Mexico assets. Chevron is the largest producer of crude oil and natural gas on the Gulf of Mexico shelf.
Bottom Line on Chevron Stock
We’ve seen that scenario of “needed” core asset sales before at energy stocks like Chesapeake (CHK), Apache (APA) and, more recently, ConocoPhillips (COP). All managed to kick the can until they were forced to cut dividends under the weight of lower energy prices, dropping cash flows and dwindling profits. You can only sell stuff, cut capex and lower headcounts so much before you have to deal with your dividend.
Is CVX in the same boat as beleaguered CHK? Not exactly, but Chevron will have to deal with its own dividend and cash flows demons — especially if oil continues to trade sub-$40 per barrel.
It’s just not generating enough cash flows to do it all, and the easiest thing to cut is going to be Chevron stock’s lucrative dividend.
CVX has already resorted to asset sales and debt spending to pay the bills. The latest asset sales at Chevron highlight the problem and are now dipping into some long life and core assets.
For investors, that’s a troubling sign highlighting the desperation at CVX to keep that dividend going. Ultimately, Chevron may not have a choice but to cut.
As of this writing, Aaron Levitt is long the Vanguard Energy ETF (VDE), which holds all the stocks mentioned in this article.
