Chevron Focuses on Sturdy Financials and Competitive Portfolios

Chevron Sees Steady Growth In Permian Shale Operations

In its latest company update, Chevron (CVX) reiterated that it would continue to focus on its financial strength by keeping a close eye on its debt levels. Chevron’s leverage ratio is quite low compared to those of its peers Royal Dutch Shell (RDS.A) and BP (BP).

Chevron’s total debt-to-total capital ratio stood at 24% in 1Q17. Comparatively, Shell’s and BP’s ratios stood at 32% and 38%, respectively. Chevron plans to keep its leverage ratio in the 20%–25% range going forward, thus maintaining sturdiness in its balance sheet. ExxonMobil’s (XOM) leverage stood at 19% in 1Q17.

CVX also plans to further strengthen its financials by continuing with cost reductions, capital expenditure (or capex) optimization, and divestitures.

Cost reductions

Chevron saved $5 billion, or 16%, in operating costs in 2016 compared to 2014. The company’s cost-saving measures are expected to continue in 2017 as well. In 1Q17, Chevron’s costs fell 26% compared to its average 2014 costs.

Capex optimization

In terms of capital and exploratory spending, Chevron has announced $19.8 billion worth of capex for 2017, ~12% lower than its capex in 2016. This reduced capex reflects Chevron’s conscious effort to optimize its capital spending in order to focus on its core projects. In 1Q17, Chevron incurred capex of $4.4 billion.


Chevron divested $2.8 billion worth of assets in 2016, progressing towards its target range of $5 billion–$10 billion for 2016–2017. Chevron’s divestiture proceeds stood at $2.1 billion in 1Q17.

Chevron focuses on competitive portfolios

Chevron also plans to improve its cash flows by focusing on its robust upstream and competitive downstream portfolios. Chevron anticipates upstream growth by way of higher volumes (~4%–9% in 2017 compared to 2016) and better margins (~$2 per barrel rise in 2017).

The company’s upstream production is expected to rise due to its operations at its Gorgon, Wheatstone, Mafumeira Sul, and other major projects, which either came online in 2016 or are expected to do so in 2017. In 1Q17, Chevron had all the three of its trains at Gorgon operational. Its Wheatstone project is also expected to deliver its first LNG (liquefied natural gas) cargo by mid-2017.

Chevron seems like it’s all set to position itself as a sound energy company. At the same time, the company is ready to take advantage of any rise in the oil price cycle with its robust upstream portfolio, valuable downstream assets, and integrated value chain, which actively generates synergetic benefits.

Chevron’s leverage position

Chevron (CVX) is focused on maintaining balance sheet strength, a crucial element of which is debt. Let’s analyze how Chevron’s leverage curve is shaping up.

Chevron’s net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio stood at 2.0x in 1Q17. CVX’s ratio was above the average industry ratio of 1.7x. The industry average considers 13 integrated energy companies worldwide.

Another parameter that’s used to compare leverages is the total debt-to-total capital ratio. In 1Q17, CVX’s total debt-to-total capital ratio held at 24%, below the industry average of 34%.

Comparatively, ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and BP (BP) had ratios of 19%, 32%, and 38%, respectively. For further details, read Did Integrated Energy Companies’ Leverages Improve in 1Q17?

Analyzing Chevron’s leverage trend

CVX’s net debt-to-adjusted EBITDA ratio rose from 0.6x in 1Q15 to a high of 2.9x in 3Q16 before falling to 2.0x in 1Q17. Before examining the rise in the company’s ratio from 1Q15 to 1Q17, let’s understand its net debt trend.

Chevron’s net debt rose from $21 billion in 1Q15 to $38 billion in 1Q17 due to a rise in its total debt coupled with a fall in its cash and cash equivalents. Chevron’s total debt rose 33% over 1Q15 to $45 billion in 1Q17. This debt was taken out to fund capex and pay dividends. CVX’s cash and cash equivalents, including its marketable securities, fell 47% over 1Q15 to $7 billion in 1Q17.

CVX’s adjusted EBITDA fell from 1Q15 to 1Q17 due to lower earnings in its Upstream segment. The fall in its adjusted EBITDA along with the rise in its net debt from 1Q15 to 1Q17 led to an uptick in CVX’s net debt-to-adjusted EBITDA multiple.

What does a leverage analysis imply?

CVX’s total debt-to-capital ratio is the second-lowest among its peers, placing it in a comfortable leverage position and providing it with financial strength and flexibility to handle difficult times.

CVX’s net debt-to-EBITDA ratio has fallen in the last couple of quarters due to the rise in oil prices, which led to a surge in upstream earnings.

Going forward, if oil prices rise and Chevron implements its financial strategy as planned, then with the focus on its robust upstream portfolio, it could witness further falls in its net debt-to-EBITDA ratio—a key positive trend that investors will be watching for.

By Michelle Rey