It’s been onward and upward for Chevron (NYSE:CVX). The company originally planned to acquire Anadarko Petroleum (NYSE:APC), a move the market did not like. The Chevron stock price dropped nearly 5% when the plan was announced.
Anadarko wound up selling to Occidental Petroleum (NYSE:OXY) instead, and with some recent help from higher crude oil prices, Chevron is again challenging recent highs.
The question now is where Chevron goes from here. That’s true for CVX stock, obviously – but that in turn depends on management strategy.
M&A may still be on the table. Shareholder returns could increase. With Chevron earnings coming next week, it’s likely strategy will be in focus, as much in performance.
Is There Another Deal out There for Chevron?
The obvious question after the Anadarko deal is whether Chevron still is interested in M&A. Anadarko wasn’t necessarily a transformative move, but at $33 billion it was a material acquisition.
And as I wrote at the time, the bidding war for Anadarko seemed like it could lead to a new wave of M&A in U.S. shale. With the worst of the 2016 plunge in crude prices behind the space, and a new focus on smart capital deployment, shale operators were in better shape.
Meanwhile, majors like Chevron and Exxon Mobil (NYSE:XOM) seemed to be in a good position to acquire growth through acquisitions.
Indeed, the logic behind Chevron’s bid for Anadarko still exists. In making the offer, Chevron cited an increased presence in the Delaware Basin, cost synergies, and growth in LNG (liquefied natural gas). It might not be able to get all of those benefits from a single transaction, but it clearly has the firepower to make further deals. A $1 billion termination fee from Anadarko gives that firepower a modest boost.
So far, however, the anticipated consolidation in the sector hasn’t played out. Callon Petroleum (NYSE:CPE), one of the stocks often cited as a potential target, is merging with Carrizo Oil & Gas (NASDAQ:CRZO) in a smaller deal. QEP Resources (NYSE:QEP) reportedly was in talks to go private, but those talks appear to have fallen through.
But the potential targets for Chevron – among them Diamondback Energy (NASDAQ:FANG) and Pioneer Resources (NYSE:PXD) – are still out there. If Chevron wants to boost its already-extensive exposure to U.S. shale, it will have options to do so.
A Chevron Stock Buyback?
The other option is for Chevron to spend up buying itself. The bid for Anadarko included a bump in the company’s share repurchase authorization from $4 billion to $5 billion. That offset some of the dilution that would have been issued to finance a portion of the acquisition.
That increase should hold, and Chevron could add the $1 billion termination fee as well. There’s also room to increase the Chevron stock dividend. The payout was increased by more than 6% in February, and Chevron could target a similar increase for 2020.
The current yield, based on a CVX stock price of $125.31, is 3.8% below that of other majors like XOM and BP plc (NYSE:BP). Chevron might look to be more competitive for income investors – or target a yield over 4%, particularly at a time when 10-year Treasury bonds are yielding barely 2%.
The CVX Stock Price Moves Up
It’s likely that these strategic questions will be a point of focus on next week’s earnings call. There’s cash coming in both from Anadarko and another $2 billion in proceeds from a sale of assets in the North Sea. That sale moves Chevron toward a target of $5-$10 billion in disposals. Investors now are going to wonder when and how the company plans to play offense.
Next week’s call could provide at least some clues. Is Chevron still looking at U.S. shale? Is LNG a priority? Or does Chevron instead simply boost its repurchase authorization to $10 billion, or higher, promising higher shareholder returns while executing on current plans?
In part because of this flexibility, last month I called Chevron one of the 7 best stocks to buy in the Dow Jones Industrial Average. The stock already has gained, with some help from crude prices. From here, Chevron stock may depend more on what its management and board of directors decide.
As of this writing, Vince Martin has no positions in any securities mentioned.
