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Chevron Trims Capex View Amid Price Turmoil, Keeps Dividend

Zacks Equity Research

The recent weakness in commodity prices prompted energy players to rethink their strategies as well as reconsider capex cuts. Notably, after conforming to the capital discipline during the crude downturn (from mid-2014 to 2016), energy companies resorted to escalating their capital expenditure since 2017. However, a recent pullback in commodity prices due to the novel coronavirus outbreak convinced explorers and producers to take a relatively cautious approach to capex programs again this year. Instead of raising capital outlays, the energy companies are now focusing on optimizing shareholder value. Pressure in the oil markets intensified by the no-holds-barred price war between Saudi Arabia and Russia.

Notably, West Texas Intermediate started the year with a little above $60 per barrel of oil. However, this uptick was a blip with the WTI price plunging to $20.37 last week, marking the lowest settlement since February 2002. Even the ‘Big Oil’ companies don’t seem to be immune to this price crash.

Following fellow supermajors, namely Royal Dutch Shell RDS.A and TOTAL S.A. TOT, Chevron Corporation CVX now announced steps to "rationalize" its planned capital spending for the current year in response to the sudden oil price slump. This San Ramon, CA-based company trimmed its 2020 capital spending guidance by 20% to $16 billion from the prior expectation for organic capital and exploratory expenses. Further, it anticipates total capital and exploratory expenses for the last two quarters of 2020 to be around $7 billion, suggesting an annual run rate 30% lower than previously provided budget announced in December 2019.

The company is making efforts to lower its run-rate operating costs in excess of $1 billion by this year end. Apart from the cost cuts, Chevron suspended its $5-billion share buyback program to weather the current oil price woes. 

This integrated energy player expects its 2020 production volumes to be in line with the 2019-level despite reducing capex, which in turn is indicative of its increasing operational efficiencies. However, by 2020 end, Permian production is predicted to see a 20% drop from the earlier guidance to 125,000 barrels of oil equivalent per day (boe/d).

Moreover, the company intends to generate sufficient free cash flow despite the current weak oil price environment, which should enable it to maintain its dividend payouts, thereby preserving shareholder values. 

Importantly, Chevron will not only be aided by its key adopted measures but will also continue to keep tabs on the commodity price movement, further aligning itself with the capex adjustment plans in response to a volatile price scenario.

After Chevron’s spending cut vow, the pressure is now firmly on ExxonMobil XOM, the biggest U.S. oil major. The company, which analysts say requires the maximum spike in oil price among all majors to maintain its capital spending and payouts, is yet to come up with any announcements on expense management.

Price Performance

This Zacks Rank #5 (Strong Sell) stock has lost 31.8% in the past month compared with the 41.4% decline of the industry it belongs to.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chevron Corporation Price

Chevron Corporation Price

Chevron Corporation price | Chevron Corporation Quote

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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
TOTAL S.A. (TOT) : Free Stock Analysis Report
 
Chevron Corporation (CVX) : Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
 
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