Chevron(NYSE: CVX) already generating a lot of money. The oil giant attracted more than $10 billion in free cash flow during the first nine months of last year, rewarding it for dividend payments and share buybacks.
It is working to create an even bigger flood of excess cash by 2026, with it in a position to increase its annual revenue by $6 billion to $8 billion. Here view of what drives it oil giant bull’s eye.
Chevron CEO Michael Wirth recently expressed his belief that the company can increase its free cash flow by $6 billion to $8 billion by next year. That’s a big increase. He cited several catalysts that position the oil company to produce even larger a source of excess cash in the coming years.
One significant driver is the Gulf of Mexico. Chevron is working on its growth outlet in the region of 200,000 barrels of oil equivalent per day (BOE/d) last year to 300,000 BOE/d by 2026. Just this week, Chevron and partner Shell started oil production from its Whale facility. The project, 40% owned by Chevron, is expected to peak production at 100,000 BOE/d during the first phase of development. Chevron also started recently production on its Anchor project and started water injection operations on two legacy fields to increase their production.
In addition, the company expects to launch a new project in Kazakhstan this year. It also continues to develop its U.S. onshore assets in the Permian and DJ basins. High margin production from these projects will help provide the company with additional cash flow.
Chevron is also working to reduce its costs for “a couple billion dollars,” said Wirth. These cost reductions will fall right to the end and boost its free cash flow.
Finally, despite the setback, Chevron still feels “very confident” that it will be able to close its acquisition Hess. While the rival Exxon and China CNOOCHess’s partners in Guyana proved to be obstacles in closing the deal, Chevron believes will receive its arbitration hearing. He can immediately close his acquisition if he does.
Chevron initially predicted the Hess purchase would help it more than double its free cash flow by 2027, assuming oil hit $70. Even without Hess, the company was on track for more than 10% annual free cash flow growth during that period (assuming $60 oil) on the strength of its organic expansion projects.
Chevron is already generating more cash than it needs to finance operations and expansion. This is evident in his capital return program. During the third quarter, Chevron returned a record $7.7 billion in cash to shareholders, including about $4.7 billion in buybacks and paying roughly $2.9 billion in dividends. That exceeded its free cash flow ($5.2 billion), as the company used its strong balance sheet to return more cash to shareholders.
Even with of these additional debt-financed returns, Chevron ended the period with 11.9% leverage ratiowell below the target range of 20% to 25%. That percentage will range down in closer after the company agreed to sell its Canadian assets in a deal worth $6.5 billion, part of its strategy to sell $10 billion to $15 billion of non-core assets by 2028.
Given Chevron’s thin balance sheet, it will likely continue to return most of its excess cash to shareholders. The oil giant will undoubtedly continue its growth streak his dividend (over 35 consecutive years). It has achieved leading dividend growth over the past five years, including giving investors an 8% increase in early 2024. The dividend could continue to grow at an above-average rate.
Chevron is also likely to target share buybacks near the upper end of its annual target range of $10 billion to $20 billion. This is enough to withdraw about 6% of its shares every year at its current valuation.
Chevron will probably use any additional excess cash to improve to strengthen their already elite balance sheet. That would do even more financial flexibility during the next oil market downturn. Company right now it has the balance sheet capacity to fund its capital program, growing dividend and share buybacks at the lower end of its target range through 2027 if oil averages $50 a barrel.
Chevron expects to add several billion dollars to its annual free cash flow over the next year a couple of year. That would give the oil giant even more cash to return to shareholders through a growing dividend and a meaningful buyback program. That combination growing cash flow and returns could give the oil producer a boost to outperform its rivals in the coming years.
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