The global energy complex is rebounding from the worst of the COVID-19 pandemic, which has to some extent promoted the sharp rise in traditional energy prices, and WTI crude oil and cloth oil prices have both hit a seven-year high in recent days. Under this trend, Valuentum, a well-known independent investment research institution, recently issued a statement saying that it is very optimistic about the future stock price performance of chevron (CVX.US), one of the seven sisters of oil.
Valuentum said that part of the reason for being optimistic about Chevron is that its free cash flow has improved significantly year-on-year, and partly because of the improvement in operating cash flow and the reduction in capital expenditure, which can be described as the best of both worlds. Unlike high-valued growth stocks, traditional energy giants like Chevron have a strong free cash flow, so free cash flow is a core factor in assessing the intrinsic value of the stock, which is also the basis for the company's distribution of cash returns to shareholders.
As shown in the chart below, Chevron's free cash flow increased from $1.5 billion in the same period in 2021 to $14.3 billion in the first nine months of 2021. Among them, the substantial improvement in operating cash flow mainly came from a significant improvement in earnings (net profit), which is a very high-quality improvement. Valuentum expects this trend to continue in the near to medium term.
Chevron Profile
In the last century, oil tycoon Rockefeller's Standard Oil Company was forced to dissolve into seven oil companies due to monopoly problems, and the well-known RDS.A.US, XOM. US) and Chevron are both associated with the seven disbanded companies.
Chevron has achieved a very comprehensive global presence in the oil industry upstream (exploration and extraction), midstream (energy infrastructure such as pipelines and storage facilities) and downstream (refineries and large petrochemical plants), as well as the broader global energy complex marketing (gas stations, distribution networks, and trading operations).
The company also has a huge economic interest in Australia's Gorgon and Whipstone liquefied natural gas (LNG) complexes, which supply LNG mainly to major energy consumers in Asia and occasionally to Europe. Chevron also has refineries in Singapore, Thailand, South Korea, California, Texas and Mississippi, supplying refined refined products to buyers around the world.
Chevron owns a 50 percent stake in the CPChem joint venture, a petrochemical giant with factories in Saudi Arabia, Singapore, Belgium, the United States, Qatar and Colombia. Its partner Phillips 66 (PSX. US) owns an additional 50% stake in CPChem. Chevron also has significant upstream operations in the U.S. Gulf of Mexico and Permian Basin, and operates a vast network of gas stations under the Chevron, Texaco and Caltex brands.
Fundamentals
Chevron had $6 billion in cash, cash equivalents and existing securities on its books as of the end of the third quarter of 2021, compared with $300 million in short-term debt and $37.1 billion in long-term debt. Valuentum believes Chevron's net debt of $31.3 billion as of the end of September 2021, including short-term debt, is manageable because of the company's excellent cash flow output capabilities and abundant cash liquidity.
Notably, chevron's net debt burden was reduced by approximately $7.4 billion from the end of December 2020 to the end of September 2021, primarily by channelling its free cash flow to repay debt.
As mentioned earlier, chevron produced approximately $14.3 billion in free cash flow from the continued recovery of the global energy industry in the first three quarters of 2021. During the period, the company's total revenue and other revenue increased 65% year-over-year, and its net profit indicator under its GAAP guidelines turned into a profit of $10.6 billion from a net loss in the same period last year. Chevron's free cash flow was only $1.5 billion in the first three quarters of 2020, as low energy prices and low demand for refined products caused by the global COVID-19 pandemic had a significant negative impact on its financial metrics.
In the first three quarters of 2021, Chevron spent $7.6 billion on its total dividend obligations, which can also have $6.6 billion in "excess" free cash flow after paying those dividends. The company has a good track record of dividend growth, and Valuentum expects Chevron to grow its dividend per share steadily in the future (the company will raise its dividend by 4% when it pays dividends in May 2021).
Looking ahead, Valuentum expects Chevron's free cash flow output capacity to remain strong, as the surge in profitability from the recent rise in oil prices will be fully reflected in the upcoming earnings report.
As an indicator of the capital expenditure budget, the company's 2022 endogenous capital and exploratory spending plans are not aggressive, reaching $15 billion. For reference, Chevron's capital expenditures before the 2019 outbreak of COVID-19 reached $14.1 billion, when crude oil prices were lower than they are now.
At Chevron's third quarter 2021 results call, held in November 2021, the company's management said it could accelerate share repurchases as the preferred leverage ratio has been brought under control. Chevron's goal is to keep the net debt-to-shareholder equity ratio below 20% and to achieve the target at a 19% ratio in the third quarter of 2021.
At the time of the release of the second quarter 2021 results report, Chevron announced that it would resume stock repurchases starting in the third quarter of 2021, buying back $2-3 billion in Chevron shares per year. Valuentum believes that chevron's current stock price is well below its intrinsic value due to improved profitability and increased share buybacks and dividends.
It has to be mentioned that the previously released Buffett third quarter listed company position holdings report shows that in a large number of reductions and "standing still", Ba Lao only increased its holdings in one company, that is, Chevron. Buffett has always attached great importance to the free cash flow of the company, so the reason for the increase in the stock god is generally interpreted inside and outside the industry that Buffett is optimistic about Chevron's future free cash flow growth.
Valuation and price target calculation
Valuentum said in the article that its free cash flow discount analysis process is based on the present value of all future free cash flows of each company, while also taking into account factors such as the net asset balance sheet. Under the "fundamental" scenario, Valuentum forecasts a fair value of Chevron at $140 per share and says that if Chevron's actual performance exceeds basic expectations, the upside is more optimistic, Valuentum stressed that if energy prices continue to remain high, it is very likely that they will exceed basic expectations. In extreme bullish scenarios, Valuentum's fair value valuation range for Chevron is capped at $175 per share.
In the chart below, investment research firm Valuentum lists the key valuation assumptions used in Chevron's corporate cash flow model under the underlying forecast. Valuentum said these should be seen as a benchmark because in the current energy pricing environment, Chevron still has room to exceed expectations.
For Chevron stock prices, what must be paid close attention to is the volatility of energy prices, especially crude oil prices.
Oil prices tend to affect the market's future expectations for Chevron's stock price, and changes in future expectations have a very large impact on the value of the stock. For example, if expectations for future revenue growth or margin expansion change, the intrinsic value of the company changes, as does the decisions that drive stock price buying and selling. The discounted cash flow model is often seen as a predictive model that reflects the market's expectations, while stock prices tend to fluctuate up and down around expectations, and if Chevron's latest performance is less than expected, the corresponding key forecast data in the model should also change.
In the chart below, Valuentum shows the likely range of Chevron's fair value forecast, including the fair value cap forecast when energy prices continue to rise and the lower fair value forecast when energy prices start to fall. The $140 forecast reflects the current pricing trajectory and level of crude oil prices, with the greater the uncertainty, the wider the fair value valuation range.
Valuentum believes chevron's share price below $105 per share (green line) is more attractive for investment, and above $175 per share (red line) is quite expensive. Valuentum said that prices falling along the yellow line, including predicted fair value, represent a reasonable valuation of the company, with the upper level of the range representing the bullish scenario predicted by Valuentum and the next level representing the bearish scenario. In Valuentum's view, Chevron's price of about $130 is a relatively positive risk/reward balance for investors.