Thematic evaluation
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Chevron Corp. (CVX)

September 24, 2024

Compared to: TotalEnergies SE (TTE) | Exxon Mobil Corp. (XOM) | Energy Select Sector SPDR Fund (XLE)

Our reasoning

Chevron appears slightly undervalued based on its strong balance sheet, consistent cash flow generation, and strategic investments in growth opportunities, particularly in the energy transition. While the company faces challenges from declining profitability and industry headwinds, its current valuation multiples below industry averages do not fully reflect its potential for long-term value creation through its diversified portfolio and ongoing strategic initiatives.

Key takeaways
  • Chevron's financial performance has been declining in recent quarters, driven by lower margins and higher operating expenses.
  • The company is facing significant challenges in the energy transition, including declining profitability, increasing regulatory scrutiny, and competition from renewable energy sources.
  • Despite these challenges, Chevron has a strong balance sheet, consistent cash flow generation, and a strategic focus on growth opportunities.
  • The company's recent acquisitions, investments in lower-carbon initiatives, and commitment to shareholder returns could support a higher valuation in the future.
  • Key factors to monitor for future performance include commodity prices, regulatory changes, the success of strategic initiatives, and the company's ability to navigate the energy transition.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Chevron Corporation is a global integrated energy company with a diversified portfolio of upstream and downstream operations. The company's upstream segment focuses on exploration, development, and production of crude oil and natural gas, while the downstream segment encompasses refining, marketing, and manufacturing of petroleum products. Chevron's key products and services include crude oil, natural gas, liquefied natural gas (LNG), refined petroleum products (gasoline, diesel, jet fuel, lubricants), petrochemicals, and renewable fuels. The company's target market includes industrial, commercial, and retail consumers of energy and petrochemical products. Chevron's primary competitors include other major integrated oil and gas companies, national oil companies, and independent exploration and production firms. For comparative analysis, we will be using Exxon Mobil Corp. (XOM) and TotalEnergies SE (TTE) as industry peers and the Energy Select Sector SPDR Fund (XLE) as a benchmark.

  2. Financial Performance:

    • Chevron's revenue has been declining in recent quarters, potentially due to lower commodity prices or a slowdown in demand. The company's profitability has also been declining, driven by lower margins and higher operating expenses. This is reflected in decreasing gross margin, EBITDA margin, and net profit margin. The company's return on average assets, return on average total equity, return on average total capital, and return on average invested capital are all decreasing and below the industry average, indicating a decline in profitability relative to assets and equity.
    • Compared to its peers, Chevron has generally underperformed XOM and TTE over the past three years, particularly in the 2-year and 3-year periods. However, Chevron has outperformed its peers in the short term, such as in the 1-week and 1-month periods. This suggests that Chevron's performance may be more sensitive to market fluctuations than its peers.

  3. Operational Efficiency:

    • Chevron's balance sheet reflects a strong liquidity position, with a current ratio above 1. However, the decreasing trend in working capital and cash and short-term investments suggests a potential shift in priorities towards capital expenditures and shareholder returns. The company's debt levels are relatively low, and it has a strong track record of generating cash flow, indicating a strong long-term solvency position.
    • Chevron is demonstrating some success in controlling operating expenses, but the increase in other operating expenses is a concern. The decreasing trend in the free cash flow margin suggests a potential decline in cash flow generation relative to revenue.
    • Compared to its peers, Chevron has generally been less volatile than XOM and TTE, as indicated by its lower annualized volatility and smaller drawdowns. However, its Sharpe Ratio has been lower than its peers, indicating that its risk-adjusted returns have been lower.

  4. Growth Opportunities:

    • Chevron is pursuing growth opportunities through strategic acquisitions, such as the acquisition of PDC Energy in August 2023, which added significant acreage in the Denver-Julesburg and Permian Basins. The company is also investing in lower-carbon initiatives like carbon capture and renewable fuels to position itself for the energy transition.
    • Chevron is advancing growth opportunities in its traditional and new energies businesses, including adding new exploration plays, achieving milestones on the ACES green hydrogen project, and commissioning the Geismar renewable diesel plant expansion.
    • Chevron's capital allocation strategy prioritizes organic growth, M&A activity, and shareholder returns. The company's free cash flow is expected to remain strong, supporting dividend growth, share buybacks, and future investments.

  5. Risks and Threats:

    • Chevron faces significant risks, including volatility in crude oil and natural gas prices, which can significantly impact upstream profitability. The company also faces potential disruptions to operations due to geopolitical events, severe weather, cyber threats, or other natural/human causes.
    • Increasing government regulations and policies related to climate change and greenhouse gas emissions pose a significant risk to Chevron's operations and product demand. The company is facing lawsuits from various U.S. state and local governments alleging the company's oil and gas operations contributed to climate change impacts.
    • Chevron also faces potential liability from environmental litigation and remediation obligations.

  6. Valuation Analysis:

    • Chevron's valuation metrics, such as P/E and EV/EBITDA, are currently below the industry average, reflecting the company's recent underperformance and the challenges it faces in the energy transition. However, the company's strong balance sheet, consistent cash flow generation, and strategic investments in growth opportunities could support a higher valuation in the future.

  7. Price Performance:

    • Chevron's stock price has generally underperformed the Energy Select Sector SPDR Fund (XLE) over the past three years. This is particularly evident in the 2-year and 3-year periods, where Chevron's returns were significantly lower than the benchmark. However, Chevron has outperformed the benchmark in the short term, such as in the 1-week and 1-month periods.
    • Compared to its peers, Chevron has generally been less volatile than XOM and TTE, as indicated by its lower annualized volatility and smaller drawdowns. However, its Sharpe Ratio has been lower than its peers, indicating that its risk-adjusted returns have been lower.

  8. Future Outlook:

    • Chevron's revenue growth is expected to be influenced by commodity prices, global demand, and the pace of the energy transition. The company's profitability is expected to be impacted by refining margins, operating costs, and the success of its cost reduction initiatives.
    • Chevron's balance sheet is expected to continue to reflect its investment strategy, with further increases in fixed assets and potentially a continued decrease in cash and short-term investments. The company's financial flexibility will be influenced by factors such as commodity prices, regulatory changes, and the success of its strategic initiatives.
    • Chevron's cash flows are expected to continue to be influenced by commodity prices, regulatory changes, and the success of its strategic initiatives.

  9. Summary:

    • Chevron is a leading global integrated energy company with a diversified portfolio of upstream and downstream assets. However, the company faces significant challenges in the energy transition, including declining profitability, increasing regulatory scrutiny, and competition from renewable energy sources.
    • Despite these challenges, Chevron has a strong balance sheet, consistent cash flow generation, and a strategic focus on growth opportunities. The company's recent acquisitions, investments in lower-carbon initiatives, and commitment to shareholder returns could support a higher valuation in the future.
    • Key factors to monitor for future performance include commodity prices, regulatory changes, the success of strategic initiatives, and the company's ability to navigate the energy transition.
Peer fundamentals 
Fundamentals
Insights
  • Chevron's revenue growth is slowing, potentially due to lower commodity prices or a slowdown in demand.
  • The company's profitability is declining, driven by lower margins and higher operating expenses.
  • Chevron is demonstrating some success in controlling operating expenses, but the increase in other operating expenses is a concern.
  • Chevron maintains a strong liquidity position, but the decreasing trend in working capital and cash and short-term investments suggests a potential shift in priorities towards capital expenditures and shareholder returns.
  • Chevron's debt levels are relatively low, and the company has a strong track record of generating cash flow, indicating a strong long-term solvency position.
  • Chevron's capital allocation strategy prioritizes organic growth, M&A activity, and shareholder returns.
  • The company's free cash flow is expected to remain strong, supporting dividend growth, share buybacks, and future investments.
  • Chevron's financial flexibility will be influenced by factors such as commodity prices, regulatory changes, and the success of its strategic initiatives.
  • Key financial metrics to monitor in upcoming quarters include revenue growth, gross margin, EBITDA margin, net profit margin, working capital, cash flow generation, debt levels, operating cash flow, free cash flow, and capital expenditures.
Analysis
  • Revenue - Revenue is decreasing, potentially due to lower commodity prices or a slowdown in demand. - The company's recent acquisition of PDC Energy has likely contributed to the increase in fixed assets and the decrease in cash and short-term investments. - Management has acknowledged that downstream earnings are under pressure from narrower refining margins and higher operating costs. - Chevron is facing challenges in the renewable fuels market due to oversupply and declining credit values.
    • Profitability
      • Profitability is declining, driven by lower margins and higher operating expenses.
      • Return on average assets, return on average total equity, return on average total capital, and return on average invested capital are all decreasing and below the industry average, indicating a decline in profitability relative to assets and equity.
      • The decreasing trend in gross margin and EBITDA margin indicates a decline in profitability.
    • Liquidity
      • Chevron maintains a strong liquidity position, with a current ratio above 1.
      • The decreasing trend in working capital and cash and short-term investments suggests a potential shift in priorities towards capital expenditures and shareholder returns.
      • The decreasing trend in working capital and cash and short-term investments could indicate a potential strain on liquidity if market conditions deteriorate.
    • Solvency
      • Chevron's debt levels are relatively low, and the company has a strong track record of generating cash flow.
      • The decreasing trend in long-term debt indicates a conservative approach to financing, which contributes to financial stability.
      • The total debt to total equity ratio is below the industry average, indicating a conservative approach to financing and a strong long-term solvency position.
    • Operational Efficiency
      • Chevron is demonstrating some success in controlling operating expenses, but the increase in other operating expenses is a concern.
      • The decreasing trend in the free cash flow margin suggests a potential decline in cash flow generation relative to revenue.
    • Cash Flow Analysis
      • Cash flows from operations are decreasing, primarily due to a decline in net income and changes in working capital.
      • Capital expenditures are increasing, reflecting Chevron's investments in growth opportunities, particularly in the Permian Basin.
      • Cash dividends paid are increasing, reflecting the company's commitment to shareholder returns.
      • The company's free cash flow is expected to remain strong, supporting dividend growth, share buybacks, and future investments.
    • Risk Factors
      • Volatility in crude oil and natural gas prices, which can significantly impact upstream profitability.
      • Potential disruptions to operations due to geopolitical events, severe weather, cyber threats, or other natural/human causes.
      • Increasing government regulations and policies related to climate change and greenhouse gas emissions.
      • Inability to achieve expected production from new development projects or successfully integrate acquired assets.
      • Potential liability from environmental litigation and remediation obligations.
      • Failure to complete the proposed Hess acquisition within the anticipated timeframe or at all.
    • Future Outlook
      • Chevron's revenue growth is expected to be influenced by commodity prices, global demand, and the pace of the energy transition.
      • The company's profitability is expected to be impacted by refining margins, operating costs, and the success of its cost reduction initiatives.
      • Chevron's balance sheet is expected to continue to reflect its investment strategy, with further increases in fixed assets and potentially a continued decrease in cash and short-term investments.
      • The company's financial flexibility will be influenced by factors such as commodity prices, regulatory changes, and the success of its strategic initiatives.
      • Chevron's cash flows are expected to continue to be influenced by commodity prices, regulatory changes, and the success of its strategic initiatives.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-23)
Energy Select Sector SPDR Fund (XLE)
  • Performance Comparison:
    • Over the past three years, CVX has consistently underperformed XLE, both in terms of absolute returns and annualized returns. This underperformance is particularly evident in the longer timeframes, such as the 2-year and 3-year periods.
    • CVX's performance relative to XLE has been inconsistent, with periods of outperformance and underperformance. However, the overall trend suggests that CVX has lagged behind the broader energy sector.
  • Risk and Return Analysis:
    • CVX has provided lower annualized returns than XLE over the past three years. This suggests that XLE has been a more profitable investment than CVX.
    • CVX has generally been less volatile than XLE, as indicated by its lower annualized volatility. This suggests that CVX has been a less risky investment than XLE.
    • CVX's maximum drawdown of 21.51% is slightly lower than XLE's maximum drawdown of 26.04%. This indicates that CVX has been more resilient to market downturns than XLE.
  • Risk-Adjusted Performance:
    • XLE has consistently offered a better risk-adjusted return than CVX, as indicated by its higher Sharpe ratio. This suggests that XLE has been a more efficient investment than CVX.
    • CVX's beta values below 1 suggest that it is less sensitive to market movements than XLE. This indicates that CVX is a less risky investment than XLE.
  • Overall Assessment:
    • CVX has underperformed XLE in terms of both absolute and risk-adjusted returns over the past three years. While CVX has been less volatile than XLE, its lower returns have outweighed its lower risk.
    • The recent trends suggest that CVX's volatility has been lower than XLE's, and its drawdowns have been slightly smaller. However, CVX's Sharpe ratio has remained lower than XLE's, indicating that XLE continues to offer better risk-adjusted returns.
    • Investors seeking exposure to the energy sector may consider XLE over CVX, as XLE has consistently provided higher returns with a similar level of risk.
Peers Price History(as of 2024-09-23)
TotalEnergies SE (TTE)Exxon Mobil Corp. (XOM)
  • Performance Comparison:
    • CVX has generally underperformed XOM and TTE over the past three years. This is particularly evident in the 2-year and 3-year periods, where CVX's returns were significantly lower than its peers. However, CVX has outperformed its peers in the short term, such as in the 1-week and 1-month periods.
    • CVX's performance has been inconsistent relative to its peers. While it has outperformed in some periods, it has significantly underperformed in others. This suggests that CVX's performance may be more sensitive to market fluctuations than its peers.
  • Risk and Return Analysis:
    • CVX has provided lower annualized returns than XOM and TTE over the past three years. This is consistent with its underperformance in the longer-term periods.
    • CVX has generally been less volatile than XOM and TTE. This is evident in its lower annualized volatility figures and its smaller drawdowns.
    • CVX's maximum drawdown of -22.26% in Q4 2023 is lower than XOM's -14.34% and TTE's -5.24%. This suggests that CVX has been more resilient to market downturns than its peers. However, it is important to note that CVX's Sharpe Ratio has been lower than its peers, indicating that its risk-adjusted returns have been lower.
  • Risk-Adjusted Performance:
    • CVX's Sharpe Ratio has generally been lower than XOM and TTE. This suggests that CVX may be offering a lower risk-adjusted return than its peers.
    • CVX's beta has generally been below 1, indicating that it is less volatile than the overall market. This is consistent with its lower volatility and drawdown figures. However, it is important to note that CVX's Sharpe Ratio has been lower than its peers, indicating that its risk-adjusted returns have been lower.
  • Overall Assessment:
    • CVX has generally underperformed XOM and TTE over the past three years, but it has outperformed in the short term. CVX has been less volatile than its peers, but it has also provided lower risk-adjusted returns.
    • CVX's lower volatility and smaller drawdowns suggest that it may be a less risky investment than its peers. However, its lower Sharpe Ratio and underperformance in the longer term suggest that it may not be as attractive from a risk-adjusted return perspective.
    • Investors should consider CVX's lower volatility and smaller drawdowns as potential benefits, but they should also be aware of its lower risk-adjusted returns and underperformance in the longer term.
Peers Fundamentals(as of 2024-06-30)
TotalEnergies SE (TTE)Exxon Mobil Corp. (XOM)

  1. Market Position and Size:

    • CVX is the second-largest company in the peer group, with a market capitalization of 264,261 million, significantly smaller than XOM's 523,765 million but larger than TTE's 154,208 million.
    • CVX's revenue, EBITDA, and net income are all significantly lower than XOM's, reflecting its smaller size. However, these metrics are all higher than TTE's, consistent with its larger market cap.

  2. Profitability and Efficiency:

    • CVX's profitability metrics, including Gross Profit Margin, EBITDA Margin, and Net Profit Margin, are lower than both peer and industry averages, indicating a potential weakness in its profitability compared to its competitors.
    • CVX's efficiency in generating returns, as measured by ROA, ROE, ROTC, and ROIC, is also lower than both peer and industry averages, suggesting a potential weakness in its operational efficiency.

  3. Financial Health and Stability:

    • CVX exhibits a strong financial health, characterized by a low debt burden, strong cash flow generation, and solid profitability growth.
    • CVX's liquidity position is slightly lower than the industry average, suggesting a potential weakness in its ability to meet short-term obligations. However, its debt position is significantly lower than the industry average, indicating a strong financial stability and lower risk profile.

  4. Valuation and Market Perception:

    • CVX's valuation metrics are mixed, with some suggesting a lower valuation relative to its peers and industry averages, while others suggest a higher valuation. This could be attributed to factors such as investor sentiment, growth expectations, and risk perception.

  5. Cash Flow and Capital Management:

    • CVX's cash flow generation strength is lower than XOM's, reflecting its smaller size. However, CVX's cash flow generation strength is lower than TTE's, suggesting a potential weakness in its cash flow generation relative to its size.

  6. Growth and Future Prospects:

    • CVX's growth metrics show a mixed performance compared to the peer group average. While it consistently outperforms in terms of Net Income, Basic Earnings per Share, and Free Cash Flow growth, it consistently underperforms in terms of Sales/Revenue, EBITDA, Free Cash Flow Margin, EBIT Margin, and Return on Average Total Equity growth.
    • CVX's growth profile is unbalanced, with strong growth in profitability and shareholder value metrics but weaker growth in revenue and operational efficiency metrics. This could be a potential red flag, as it suggests that CVX's growth may not be sustainable in the long term without addressing its challenges in expanding its market share and generating returns efficiently.

  7. Potential for Investment:

    • CVX presents a mixed investment perspective. Its strong earnings and profitability growth, robust cash flow generation, and low debt levels are attractive features for investors seeking a financially stable and value-oriented company. However, its lower profitability margins, lower efficiency in generating returns, and unbalanced growth profile raise concerns about its long-term growth potential and competitive position.

  8. Key Risks and Considerations:

    • CVX's lower profitability margins and lower efficiency in generating returns compared to its peers and industry averages pose a risk to its long-term profitability and shareholder value creation.
    • CVX's unbalanced growth profile, with strong growth in profitability but weaker growth in revenue and operational efficiency, raises concerns about the sustainability of its growth trajectory.
    • The energy industry is subject to significant volatility, including commodity price fluctuations, geopolitical risks, and environmental regulations, which could impact CVX's financial performance.

  9. Overall Assessment:

    • CVX is a financially sound company with a strong track record of profitability and cash flow generation. However, its lower profitability margins, lower efficiency in generating returns, and unbalanced growth profile suggest potential areas for improvement.
    • Investors should carefully consider CVX's competitive position, growth prospects, and the inherent risks associated with the energy industry before making any investment decisions.