Chevron Corporation CVX is making strategic moves to balance its growth aspirations and shareholder returns. Recently, the company announced a $2 billion reduction in its 2025 capital spending, including a notable decrease in investments in the Permian Basin, its most productive asset. Chevron plans to allocate $4.5 billion to $5 billion to the Permian, down from the 2024 levels, shifting its focus from aggressive production growth to maximizing free cash flow. This strategic pivot is reflective of the integrated energy major’s broader aim to prioritize profitability and shareholder returns amid flat oil price forecasts.
In addition to the Permian, Chevron's $14.5 billion to $15.5 billion capital budget will fund high-return projects in the Gulf of Mexico, where deepwater production is expected to ramp up to 300,000 barrels per day by 2026. Internationally, $1 billion will go toward projects like the Gorgon LNG backfill in Australia. Meanwhile, Chevron remains committed to cutting structural costs by $2-3 billion by 2026 and plans significant divestitures of higher-cost assets.
CVX Prioritizes Cash Flow Over Growth
Chevron Corporation’s recent decision to reduce capital spending, including in the lucrative Permian Basin, signals a calculated shift toward bolstering its free cash flow. This comes on the heels of a strong Q3 performance, wherein Chevron generated $9.7 billion in cash flow from operations and announced $7.7 billion in shareholder distributions. Yet, for investors, the question remains: is this a good time to buy, hold, or wait on Chevron stock?
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Chevron Focuses on Growth With a Leaner Spending Plan
Chevron's 2025 capital plan reduces overall spending to $14.5-$15.5 billion, down from $17 billion in 2024. Permian Basin spending will decrease to $4.5-$5 billion, even as production is set to reach one million barrels per day by 2025. This strategic realignment emphasizes free cash flow over aggressive production growth, ensuring that the company can sustain its robust dividend and share buybacks, which are projected to return $10-$20 billion annually.
Investments will focus on high-yield projects, including the Gulf of Mexico, where production is expected to grow substantially. International spending includes $1 billion in Australia for Gorgon LNG and investments in Kazakhstan's Tengiz project, which is set to deliver first oil by mid-2025. Chevron is also steering $1.5 billion into lower-carbon and new energy ventures, aligning with its commitment to sustainability.
Other Positives in the CVX Story
Unmatched Dividend Reliability: Chevron’s dividend history is exceptional, with 113 uninterrupted years of payments and 37 consecutive years of growth, reflecting strong financial resilience. It offers an attractive 4.2% dividend yield, supported by a low payout ratio of about 57, making it a reliable option for income-focused investors. Over the past five years, Chevron’s dividend has seen a compound annual growth rate (CAGR) of more than 6%, and hasn't been cut in 90 years.
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Discounted Valuation Relative to Peers: Chevron's stock is attractively valued, trading at a multiple of 5.99 based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization). This is around 6% below its 10-year average and compares favorably to its peer, ExxonMobil XOM. The company has a Value Score of B.
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Risks and Challenges on CVX’s Horizon
Despite its strong free cash flow and shareholder-friendly policies, Chevron faces significant risks. Oil price volatility remains a key concern, as lower prices could strain profitability. Geopolitical risks, particularly in regions like Kazakhstan, could also disrupt operations. Additionally, analysts have downgraded Chevron’s earnings outlook for Q4, repeatedly slashing estimates over the past few months and projecting a year-over-year decline in EPS.
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Furthermore, Chevron’s ambitious buyback program, set at around $4 billion per quarter, could face challenges if free cash flow falls short. The company may need to dip into reserves, raising concerns about financial sustainability.
The market has shown little enthusiasm for Chevron this year. In 2024, the stock has eked out a mere 0.1% gain, significantly lagging behind the S&P 500’s impressive 27.7% surge. Chevron has also trailed the broader Oil/Energy sector and its subindustry during this time.
CVX Year-to-Date Stock Performance
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Adding to the challenges is Chevron’s $53 billion acquisition of Hess Corporation HES, which faces legal hurdles. ExxonMobil is contesting the deal, citing alleged right-of-first-refusal claims on Guyana assets. This arbitration process could stretch into late 2025, casting uncertainty over Chevron’s ability to secure these high-value assets.
The Verdict: A Strategic Hold With Long-Term Potential
Chevron’s disciplined approach to capital spending and cost optimization reflects a sound strategy to weather market uncertainties while delivering shareholder value. Its strong dividend yield, robust buyback program, and leading position in deepwater drilling make it an attractive option for long-term investors.
However, with risks of geopolitical instability, oil price fluctuations, and a softening earnings outlook, Chevron may not be a buy for those seeking immediate gains. Current shareholders should consider maintaining their positions to benefit from potential long-term upside, while new investors might wait for a more favorable entry point. As Chevron balances growth with cash flow, it remains a key player to watch in the evolving energy landscape.
The stock currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
