Empowering Energy Futures, Tactical Growth And Sustainable Innovations

Key Takeaways

• Chevron's strategic focus on renewable energy and new technologies like hydrogen signals a pivot towards sustainability and diversification, opening new revenue streams.
  
• The merger with Hess Corporation underscores Chevron's ambition for market leadership through expanded asset portfolios and operational efficiencies, enhancing earnings potential.
  
• Chevron may face reduced long-term revenue and unpredictable earnings due to the shift towards renewable energy, regulatory changes, high capital expenditures, and geopolitical risks.

Catalysts

Through its subsidiaries, engages in the integrated energy and chemicals operations in the United States and internationally.

• Chevron's consistent cash return to shareholders over the past eight quarters, amounting to over $5 billion each quarter, signals a strong financial footing and shareholder-focused management strategy, potentially impacting future earnings positively.
  
• The completion and start-up of the WPMP project, part of Chevron's strategic operations in the Tengiz field, alongside significant progress on FGP, point to an increased production capacity and operational efficiency, likely enhancing revenue and reducing operating costs.
  
• Chevron's active investment in renewable fuels and hydrogen businesses and the announcement of its third Future Energy Fund for lower-carbon technologies indicate a strategic pivot towards sustainable energy sources, which might open new revenue streams and improve net margins through diversification.
  
• The merger with Hess Corporation, aimed at creating a premier energy company, could lead to the realization of synergies, operational efficiencies, and an expanded asset portfolio, thereby potentially increasing earnings through enhanced market positioning and economies of scale.
  
• The reported highest first quarter worldwide oil equivalent production in company history, with more than 12% increase from the previous year, including a 35% increase in the United States mainly due to organic growth and acquisitions, signals strong future cash flow potential due to elevated production levels impacting revenue growth directly.

Assumptions

• Analysts are assuming Chevron's revenue will decrease by -0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $25.3 billion (and earnings per share of $14.32) by about July 2027, up from $20.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $33.8 billion in earnings, and the most bearish expecting $19.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2027 earnings, up from 14.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 1.42% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

Risks

• The advancement of lower-carbon technologies and the transition to renewable energy sources may lead to underutilization of traditional oil assets, impacting Chevron's long-term revenue from its core business operations.
  
• Regulatory changes or stricter environmental policies could result in increased operating costs or mandatory reductions in carbon emissions, potentially affecting net margins.
  
• High capital expenditure on projects like WPMP and the Future Growth Project without guaranteed returns could strain cash flow, especially if these projects encounter technical or execution challenges.
  
• Volatility in global commodity markets, as seen with fluctuations in natural gas realizations and refining margins, can lead to unpredictable earnings.
  
• Political and regulatory risks in operations locations, such as potential changes in legislation in the U.S. (e.g., Colorado) or international geopolitical tensions, may disrupt operations and adversely affect Chevron's earnings.

Valuation

• The analysts have a consensus price target of $182.27 for Chevron based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $206.0, and the most bearish reporting a price target of just $155.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $190.5 billion, earnings will come to $25.3 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $157.77, the analyst's price target of $182.27 is 13.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.