Chevron’s brilliant investment strategy could pay big dividends in 2024 and beyond

Chevron (CVX 1.33%) recently released its preliminary capital plans for 2024. The oil giant expects to increase its capital spending by about 11% next year. It focuses on investing in projects that will provide high returns and sustainable cash flow. That will give it more money to return to shareholders through dividends and share buybacks. Here’s a look at Chevron’s plans for next year.

Acquisition-driven spending increases

Chevron plans to invest between $15.5 billion and $16.5 billion in organic capital projects next year. In addition, he sees capital expenditure joint ventures (CPChem and Kazakhstan) amounting to about $3 billion. That’s about 11% more than last year in the middle.

The company’s budget does not include capital expenditures related to Hess (HES 1.72%), which Chevron agreed to acquire in October. The company expects this deal to close in the first half of next year. It sees its annual capital expenditure budget rising to a range of $19-22 billion after the Hess acquisition.

One of the factors driving Chevron’s increase in capital spending is the recently completed acquisition of PDC Energy. Chevron expected to increase its capex budget by $1 billion a year after its PDC Energy deal, increasing its range to $14-16 billion by 2027. It could eclipse the high end of that range next year. However, the company also expected the deal to add $1 billion to its annual free cash flow, assuming oil averages $70 a barrel (crude is currently in the mid-$70s).

Drilling for money

Chevron plans to spend about $14 billion of its capital budget on oil and gas exploration and production projects. It will invest roughly two-thirds of that money in its U.S. operations, including about $5 billion in the Permian Basin. Chevron plans to invest another quarter of its capital in its Gulf of Mexico operations, including the Anchor project, which is due to start producing oil next year.

Chevron’s focus on the Permian Basin is notable. The company can earn a high return on capital employed (ROCE) and generate increasing free cash flow.

Image source: Chevron. ROCE = Return on Capital Employed.

Chevron’s focus on drilling in high-return zones like the Permian has paid off over the years. It has achieved leading improvement in its ROCE over the past five years. The company expects to continue to improve ROCE over the next several years by investing capital in its highest-returning operations, such as the Permian. This helps drive strong cash flow growth for the company. Chevron sees its free cash flow more than doubling by 2027 as it executes its investment strategy.

Chevron also plans to invest about $1.5 billion in downstream capital projects (eg, refining) and about $2 billion in lower-carbon projects as it slowly grows new energy business lines. Among the notable lower-carbon projects is the Geismar Renewable Diesel Expansion Project, which is due to start next year. The company’s growing, lower-carbon energy platform could become a significant future driver of free cash flow.

Generating more cash to return to shareholders

While Chevron is ramping up capital spending, CEO Mike Wirth said it is “maintaining capital discipline in both traditional and new energies.” Focuses its investments on those that achieve attractive returns. In addition, Wirth stated, “These investments are expected to support sustained free cash flow growth to support our goal of returning more cash to shareholders.”

Chevon’s dividend is one aspect of shareholder return. The company has increased its payout for 36 consecutive years and has increased its dividend at a leading 6% annual rate over the past five years, including a 6% increase earlier this year.

The oil company expects to increase its dividend at an even faster pace next year, with plans to increase its payout by 8% in January. It can deliver higher sustainable dividend growth going forward, fueled by its high-return capital investments and the ambitious Hess deal. Chevron can grow its free cash flow at a more than 10% annual rate through 2027 at an average oil price of about $60 a barrel.

Chevron also plans to increase its share buyback pace. It expects to increase its annual share repurchase rate by $2.5 billion after the Hess acquisition closes, raising its buybacks to the upper end of its annual range of $10 billion to $20 billion. It may continue to buy back shares at the upper end of that range if oil prices remain above $70 a barrel.

A well-oiled machine

Chevron plans to increase capital spending next year. These investment costs should pay off in the future because they focus that capital on high-return projects that should generate incremental cash flow. That would give Chevron more cash to return to shareholders through dividends and buybacks.

This combination of increased cash flow and shareholder returns could give Chevron the fuel to deliver attractive total returns in the coming years, making it look like an excellent oil stock to buy over the long term.

Leave a Comment

Your email address will not be published. Required fields are marked *