Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) – in oil, these are the two big guns, always compared with one another. In 2020, CVX stock has done “better,” but it’s been something of a booby prize. Shares are down almost 26%, which is terrible except Exxon is down nearly 40%.
Next year must be better, right? With the pandemic ending, with competitors having busted and people free to travel, Chevron is promising better times.
Problem is, how long and how good? CEO Mike Wirth says the future is low carbon and high returns. Right now, the dividend yields 5.7% and most analysts are on board.
Should you be?
More Capital to You
Chevron has set a capital budget of $14 billion for 2021 and says it is focused on higher returns.
Chevron finished buying Noble Energy for $5 billion in stock in October, adding its interests in the Permian Basin and eastern Mediterranean. Even with Noble, future capital budgets have been slashed by one-third, from $19-22 billion to $14-16 billion through 2025. While Exxon is exploring for new reserves, Chevron is buying them.
I said in March that Chevron was liquidating itself. A month later I worried about its dividend. The dividend worries are gone for the short term. The Noble deal extends the life of Chevron’s most profitable fields. The big winners in the Noble deal were its bondholders, who now have a stronger hand on notes paying up to 8%.
Chevron vs. Exxon
Chevron says it has a lower break-even price on oil than Exxon and creates less pollution per barrel. Wirth says he wants to be measured by actions, like shutting part of a natural gas terminal in Australia to fix a leak. He said recently the company is investing in hydrogen and nuclear fusion. But the focus remains oil and you will still be using carbon in 2050, he insists.
Still, Chevron’s decision to focus on sure things means it is taking on new debt more slowly than Exxon. Its debt-equity ratio is still just .26. Its conservative attitude means it didn’t have to take the huge asset write-down of its rival.
But there are still risks for CVX stock. Chevron has assets in Venezuela. Those assets prop up a leftist dictator, and Trump administration sanctions helped him win Latino voters. That business may have to be written off if President-elect Joe Biden doesn’t extend licenses. Or there could be a rightist dictator, which would be all right.
While Wirth talks about a lower-carbon future what matters to investors is a lower-debt future and a lower-risk future.
CVX stock cut its losses to just $209 million for the third quarter, 12 cents per share, after losing over $4.5 billion in the previous two quarters. The company is due to report its December quarter on Jan. 29. A small profit of 13 cents per share is expected on revenue of $28.9 billion. With Noble results added, revenue should be almost $5 billion higher than previously. Analysts are expecting $2.86 per share of earnings in 2021, which is still not enough to cover the quarterly dividend of $1.29. But enough to justify it.
The Bottom Line for CVX Stock
Chevron is being more realistic than Exxon about the long-term future. It has pledged to keep pumping out dividends even as its proven reserves drop, while Exxon still has big plans to develop fields in South America.
Chevron still has positive free cash flow. If global oil prices firm next year that dividend still looks safe.
The question is how long that can continue. Chevron is whistling past the carbon graveyard, electric vehicle use is increasing, and nation states are taking more control over their markets. Income investors can buy Chevron for 2021 but need to pay close attention. If that dividend comes under renewed threat, get out.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn.