Is Chevron Dividend Safe?

Chevron Small

Chevron Corp (CVX) is one of the largest oil & gas companies in the world. The company has a market cap of $160B and is an energy behemoth that operates in upstream and downstream businesses.

Last week, the company reported quarterly earnings of -$0.31 on a revenue of $29.25B, which is down 36.6% YoY. Its the first quarter that Chevron had such a huge loss in the past 13 years. While investors were expecting a bad quarter (and a bad year) from Chevron, it was still better than expected as the revenue beat the expectations. The company also announced a quarterly dividend of $1.07, which is what it has paid since Q2 2014.

The media lit up with news from Oppenheimer analyst Fadel Gheitpredicting a dividend cut from Chevron in the coming quarters as he predicts that the company is on an unsustainable path of borrowing funds to pay the dividends.

Segmented View

Before we take a look at whether the dividends are sustainable, I want to highlight the segmented view of the company. As seen from the summary below, Chevron is bleeding money in the upstream segment. It is a sign of the times. Most major oil producers and upstream operators are hurting currently and Chevron is in the same boat. A segment that generated profits of $16.8B in 2014 (when the oil correction had already started) is now losing approx $2B for the year 2015.

Chevron has relied more on the upstream business in the past to generate its profits. In 2014, the company reported 87% of its profits came from the upstream business.

(Source: Chevron Q4 Earnings Report)

The bright spot in the report is the downstream business. As we have seen with other companies who solely operate in the downstream business of the energy market, the segment is doing well and is able to generate good ol’ reliable cash for the businesses and in fact, Chevron’s downstream is doing much better than before. The downstream segment saw its profits jump from $4.3B to $7.6B.

The Future of Chevron

As things stand, if the oil prices remain low, Chevron will continue to suffer. Whether oil prices will go up or stay low is anybody’s guess. There are complex issues at play, which are extremely hard to predict and is simply not a question of supply & demand (although that’s a big part of it). There is also the question of geopolitics, social unrest, potential of wars, currency markets etc.

The strong US$ is probably the biggest factor weighing on the commodity prices currently – and there is no sign of letdown. The US$ is on a bull run and history has shown that the cycle usually lasts 7-8 years and we are only halfway through this cycle. So, oil prices can be expected to stay low for the next couple of years, if not longer.

So, what is Chevron to do? It’s a company that relies heavily on the upstream business segment and wants higher oil prices. The longer the oil prices stay low, the more imperative it becomes that Chevron start shifting focus to the downstream segment. While the downstream segment saw some increased profits, Chevron seems more focused on selling those high margin assets with CEO John Watson saying “We continued to reshape the downstream portfolio with well-timed asset sales and good progress on petrochemical investments.” He also went on to say that the company advanced major upstream projects in 2015 including two deepwater projects in Africa, Jack/St. Malo in deepwater Gulf of Mexico, shale and tight resources in Permian Basin, and Gorgon Project in Australia.

Looking at the capex details, Chevron did spend more on the US downstream segment in 2015 and cutback on the US & International upstream segments. But the moves have been minimal – which possibly suggests that Chevron is simply waiting to sit this storm out – hoping for the oil prices to go back up. Something that investors should stay wary of.

Financials & Balance Sheet

Chevron currently holds $11B in cash and cash equivalents. The company has sold some of its assets in 2015 which brought in $6B, and more sales are planned in 2016 and 2017. Last year, the CEO indicated that the company intends to sell $15B worth of assets between 2015 and 2017. So, possibly $9B more of sales coming soon?

On the debt repayment front, the company is due for about $1.45B in 2016. More importantly, a much bigger debt repayment of $6.1B is due in 2017.

(Source: Morningstar)

Analysts project another dismal year for Chevron in 2016, with a revenue estimation of $113B (down 18% from 2015). Earnings are expected to shrink to $3.4B (based on an EPS estimation of $1.85). Based on the current payout of $4.28 in dividends, the company spends $8B in dividends.

Conclusion

Chevron just had a terrible year in 2015. The company reported an annual revenue of $129B and profits totaling $4.5B. 2016 is expected to be no different as the oil market remains under pressure. The market is tough for upstream operators and a majority of Chevron’s operations remain in the upstream market. Analysts are suggesting that the debt loading to support the dividend payout is not sustainable and will eventually lead to a dividend cut. While true, no time horizon is provided by the said analysts. Since long term projections are very tricky with any market, let alone the oil market, a focus on 2016 shows that between the current cash on hand ($11B), asset sales ($9B?), earnings in 2016 ($3.4B estimated), and the debt repayment ($1.45B) – the current dividend payout amount ($8B) is safe. At least for this year. But time will start running out for Chevron the longer oil prices remain depressed.

Full Disclosure: Long CVX. My full list of holdings is available here.

30 thoughts on “Is Chevron Dividend Safe?

  1. JC says:

    It’s definitely tough in the oil patch right now. I think Chevron will pull through this but I need to run through some other numbers to see how if a cut could be on the horizon.

    • Hi JC,
      The US producers are hurting…hopefully its not affecting you personally. The supply side has come down quite a bit and looks like its starting to form a bottom…but I dont really expect a jump up anytime soon. Looks like oil will stay low for a while. Chevron might pull through, but they might see higher borrowing costs (S&P just downgraded them today).

      R2R

      • I had to deal with a paycut in 2015 and so far have been staying relatively busy. But we’ll see how things play out this year and I hope I can avoid a layoff. Who knows though because if oil just hangs out around here it’s going to get even uglier in the oil patch.

        I’m hoping that some of the smaller debt fueled E&P companies will finally start running into issues. There hasn’t been much in the way of bankruptcies which has been surprising to me considering how leveraged a lot of the companies are. The leverage looked fine over the last few years and allowed them to expand operations beyond the business fundamentals but it’s coming back to haunt them now.

        • From what I hear, bankruptcies can be expected to pick up in the next few months – I think they were saying Q1 and Q2 should see some activity there..once that starts, we might see some desperate M&A deals. I think ppl are also keeping an eye on the majors like XOM and CVX to signal the right time – some speculators are anticipating, once these majors start moving – we will probably see the bottom in the prices.

          Interesting times….hope your job stays secure. Investing and diversifying your income sources definitely helps in such cases.

          Best wishes
          R2R

  2. Great article R2R, I agree that their dividends look safe in the near term. Personally, I’ve stayed away from oil and energy lately but I do think investors will be given plenty of opportunity to invest or average down their holding throughout the year. At current prices, it might not be a bad idea to look at big oil companies (like CVX) during future dips if your willing to wait out a few years for a turnaround.

    AFFJ

    • Hi AFFJ,
      Its amazing how fast things changed with the continued drilling by OPEC countries bringing that oil price down fast. Looks like its going to stay down for a while. CVX and other majors will see pressure and might have to consider M&A…but first we will probably see some bankruptcies in the oil energy. Hold tight…things can get rough this year.

      R2R

  3. Thanks for sharing Sabeel. Yeah, definitely the low oil prices remaining this low has really pummelled all the oil majors. It’s part of the cycle and they’ll pull through. Just too volatile with stock price and now the dividends is in jeopardy. I’ve learned that one shouldn’t have too much allocated to the oil sector. I can withstand it but it really does suck seeing all your oils in deep red. You live and you learn and moving forward, I will build up other sectors.
    Cheers and keep up the great work here as always. Thanks bud.

    • Yeah…the oil majors are best positioned to come out of this. They have good ratings (although CVX got hit by a downgrade today by S&P)…still they can borrow at good rates and continue the support for dividends if need be. CVX already eliminated buybacks last year (just goes to show that companies always buyback high and stop buybacks when stocks are cheap) and now XOM did the same. Hopefully it wont come to dividend cut. For now, its a wait and see (and collect my dividends) approach.

      R2R

  4. 2016 is the year I’d buy up some oil. But as of now with a lot of uncertainty and it seems like the stocks price doesn’t correlate with earnings as a lot of them have been spending money on buy back. Some has suspended buyback, we’ll see if the price can still hold.

    As of now, I’m buying stocks with low P/E which signifying oversold. As their top and bottom line beat or meet or even making profit rather than the “uncertainty” of oil dividend.

    Nonetheless, CVX, COP, BP, XOM are my tops name I’d like to add into my portfolio.

    • The buybacks days are behind us in the energy sector (just goes to show that companies are no smarter than retail investors – following the buy high mentality). Hopefully it wont come to dividend cuts, esp with the oil majors. My only recommendation is – buy quality – and they dont get any better than XOM and CVX.

      R2R

  5. I think ultimately the answer to the question is answered by the price of oil and when it decides to go up. Every ‘expert’ seems to have a target for oil by the end of the year between $80 oil to $10 depending on who you ask. I own both XOM and CVX and I’m basically crossing my fingers for oil to go up. KMI already burned me, I hate to have it happen again.

    • From most of the interviews Ive heard and looking at futures markets and other clues from various other parts of the capital markets, it looks like oil will stay low for the next couple of years. In fact, most people that I pay attention agree that it will stay around $40-ish in 2016, $50-ish in 2017 and $60-ish in 2018. But yes, Ive heard some say that it can fall as low as $10 as well…so, we might be range bound between those numbers.

      I read somewhere that CVX needs $46/barrel to turn a good profit based on their expenses, although I havent calculated it myself and validated this data. Overall, I think XOM and CVX are probably the best place to be if you want to stay invested in oil/energy market. They have great credit rating and can borrow funds at a low rate. But I am not going to be dismissive either (I got burned by KMI as well). I will be keeping a close eye and will consider selling CVX if I decide that I am taking unnecessary risk without much of a reward.

      R2R

  6. Thanks for the article R2R. I don’t think Chevron will cut this year, but…. I can’t believe management’s focus on upstream operations. Chevron is a large holding in our portfolio, and I have to say i am less comfortable with it than I used to be. We’re still holding……for now anyway
    -Bryan

    • Agreed. Thats the big takeaway I had this weekend. I knew Chevron was selling some assets but didnt realize that they were selling the high margin downstream and doubling down on the upstream segments!! I am getting less comfortable with the investment as well and considering selling out on it. The longer oil stays lower, the more these companies will be bleeding money. But then other hand, oil could recover and we are paid 5% in dividends to wait and see. Tough call.

      R2R

  7. Thx for the analysis. I am very interested in oil analysis at this time.
    In my play money portfolio, oil stocks are a big big part.
    Chevron is not yet a holding here directly, it probably is via the xle tracker. Till now I considered it safe. I guess I need to look at the individual holding s in there.

    • Hi AT,
      Oil companies arent as safe as they used to be. COP just announced a dividend cut by 2/3 this morning and if a large cap like COP can be in trouble, theres no telling how many smaller players are running on borrowed time. For now, I am taking a wait&see approach with Chevron. Lets see how things progress.

      R2R

      • Well, chevron is the 2nd biggest holding in the XLE tracker. I am short a put till Feb 19… Fingers crossed I can buy it back for a small profit.
        I read indeed more and more stories on companies that borrow for dividend. I just find that insane. Although, I do understand they do not want to loose their dividend aristocrat status…

        • Yeah…but in course of chasing and keeping that status, they are putting the whole company at risk. IBM is another company that does that – and I have been very critical about it. The low interest rate environment is blowing up all sorts of crazy bubbles these days. Buyback bubble will eventually burst…just not yet.

          R2R

  8. Hi R2R,

    No, is my answer to your title question. The world is aiming at reducing energy and oil usage so, in my mind, there will be less and less volume sale for companies to compete for. In the long run, oil doesn’t have a upwards future, just a matter of time. That’s my view anyway.

    Tristan

    • Hi Tristan,
      I think the problem is with supply-side and not demand-side. The demand is there. Yes, the developed economies are making pledges to wean off of the fossil fuels and invest more in green tech, but the emerging markets where most of the economic growth exists is still growing at a pretty rapid pace. People talk about China slowing down – but what is the slowed pace? Its still 6%-ish, which is a phenomenal growth rate for the world’s second largest economy. From what I read about the Paris Climate Change summit, the understanding between the leaders is for the developed countries to take these initiatives and not pressure the developing countries to cut back on emissions. If they want to, sure…but there were no ultimatums and finger pointing from what I saw.

      Just playing the devil’s advocate here 😉
      R2R

  9. An argument could be on either side of the asset sale issue with the answer based on the underlying price of oil. Since few of us – including analysts – can even address the fundamental questions you addressed, any attempts are pure speculation. So my theory is that CVX is biding time until 1) oil recovers (to a degree) and/or 2) attractive assets become available. But the time to identify their strategy is limited. With all else being equal, their December dividend announcement will likely be telling. Can they afford to raise – even by a fraction of a penny – to retain aristocrat status, or not. If not, as investors begin to bail, the stock price will suffer, perhaps straining some bank covenants.

    • Agreed…what CVX is doing is buying time with this strategy and hoping oil will recover. We’ll have to wait and see how things progress. I will probably revisit in a few months and check up on the books.

      R2R

  10. I read somewhere (I don’t remember if it was on The Conservative Income Investor, Simply Safe Dividends, or somewhere else) that if oil stayed at $30 roughly per barrel, that CVX could go a year or two without needing to cut dividends. Past that and, well, we’d really need to see a rise in oil prices.

    Long term, I’m bullish on oil. Even with CVX’s focus on upstream operations, I can’t imagine a scenario in which CVX’s dividends are permanently at risk.

    All that stuff we read about value investing and buying a beaten gem of a stock and all that? Guys, this is go time. I bought KMI after it’s dividend cut and now I’m considering XOM. Preferably after a price drop that sees it’s P/E compress, but that’s not too major an issue for me right now. Many of us who started after 2008 talk about the virtues of buying those beaten gems but have never experienced tough times. Now it’s time to put our money where our mouths are.

    “This is not a drill.”

    Energy might be having some short term pain, but over the years, we will have more people on this planet in an even more technological world which will require more energy. I think energy is quite the safe bet long term. This massive drop in oil and oil stocks is a near once in a lifetime opportunity that we may not get again.

    Sincerely,
    ARB–Angry Retail Banker

    • You sure are bullish on energy 🙂
      I hear you – the energy requirements from the world are growing – and growing at good pace. Emerging markets are consuming more and more and the distressed prices are doing well for those economies. But the market is also flooded with cheap oil – which is a cause for concern for companies like XOM and CVX and I think you are right – CVX needs somethign around $45/barrel to break even or sustain the balance sheets. But if anyone will come out of this (even if they are bruised) it will be XOM and CVX.

      R2R

  11. Great article R2R! I hate to say it but my answer is I don’t know. I know these major oil companies are cutting, laying off, and slashing everything they can to maintain heir dividend. But when is enough going to be enough? How much can these companies continue to slash before they have to face the facts? Hopefully, the oil problem will solve itself soon, the price begins to rise, and the decision to maintain and possibly grow a dividend is an easy one for management. If oil remains depressed for an extended period of time though, I don’t see how these companies will be able to maintain their current dividend.

    Anyway, just some of my thoughts. Great article again as it forced me to re-consider all of these questions.

    Take care and have a great weekend!

    Bert

    • Hi Bert,
      For now things seem to be on hold – Chevron is buying time and hoping for things to recover. I guess we will have to wait and see how things progress. I will revisit in a couple of months and see how things are stacking up and make a decision.

      R2R

  12. CVX is definitely NOT a buy at these levels… It is an extremely risky bet at this stage of the game, for certain… Now is not the time to be playing hero ball… If an investor has no clue where oil prices will be headed in the next 6-12 months, what makes you so confident to jump into the fire right now?

    If CVX had ample margin (they don’t), it might make sense to add… When you are NEGATIVE free cash flow, selling off assets (just about the stupidest thing you can do during a downturn; buy high, sell low) and have to take on debt to fund a dividend, get real… The fundamentals do not support the current dividend, let alone an increase.

    Sometimes the most prudent course of action is to take no action. As it pertains to commodities, I am way more focused on buying up beaten down gold/silver/copper/uranium juniors who have been hit much harder. If I was to go hunting in the oil space, I would focus on juniors with extremely strong balance sheets and world class assets. In that sense, you would be able to find gems selling for pennies on the dollar. When oil stabilizes, which it will, I would book profits and swap back into the more stable, dividend paying majors… Only after the dust has settled. XOM would probably be the only major on my radar right now, but also NOT as these prices.

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