Chevron Looks to Trim Billions in Expenditures, Bolstering its Impressive Free Cash Flow and Return on Cash in 2025
Chevron, with a ticker symbol CVX currently hovering at 1.49%, is already a cash flow powerhouse. The oil titan churned out an impressive $5.7 billion in cash during the last quarter. This cash, coupled with its robust balance sheet, enabled the company to distribute a record $7.7 billion back to its shareholders through dividends and share buybacks.
The oil heavyweight is aiming to produce even more cash in the coming year, providing it with ample funds for further return distribution. Let's delve into Chevron's 2025 strategies.
Analyzing Chevron's 2025 Plans
Chevron recently unveiled its 2025 capital spending plans. The oil giant anticipates organic capital expenditures to fall between $14.5 billion and $15.5 billion. Furthermore, anticipated capital spending at affiliates is projected to fall within the range of $1.7 billion to $2 billion. In totality, these spending ranges represent a $2 billion reduction compared to Chevron's capital spending in 2024.
About 90% of this budget will be allocated towards upstream projects, with two-thirds targeted at developing its U.S. resource portfolio. Chevron plans to scale back capital spending in the Permian Basin to between $4.5 billion and $5 billion. This shift implies slower production growth but enhanced free cash flow. The remaining funds will be distributed between the DJ Basin and the Gulf of Mexico, where several projects are poised to double its production in the Gulf by 2026.
Notable investments include $1 billion for Gorgon LNG projects in Australia, $1.2 billion for downstream projects, and $1.5 billion for lowering carbon intensity and growing new energy businesses. Additionally, Chevron is investing capital in its Kazakhstan joint venture and the expansion of its chemicals joint venture with Phillips 66.
Reducing Structural Costs
Besides cutting capital spending, Chevron is also working to reduce some of its structural costs. The company aims to achieve $2 billion to $3 billion in cost savings by the end of 2026. This will be accomplished with some near-term costs associated with business restructuring and the sale of non-core and higher-cost assets. Chevron anticipates incurring $700 million to $900 million in restructuring costs in the fourth quarter and $400 million to $600 million in impairments and other charges.
Part of these costs stem from Chevron's portfolio optimization strategy. Chevron has agreed to sell its Canadian assets for $6.5 billion and assets in Congo and Alaska. This is part of a plan to divest $10 billion to $15 billion in higher-cost, higher-carbon assets by 2028, thereby bolstering its financial flexibility. Chevron is also negotiating a deal to acquire Hess, which could close in the next year. This acquisition would strengthen and extend its production and free cash flow growth outlook into the 2030s.
Boosting Free Cash Flow in 2025 and Beyond
Chevron's 2025 capital plan calls for exchanging some production growth for more significant free cash flow growth in the upcoming year. Boasting substantial cash reserves, Chevron produced $10.7 billion in free cash flow through the first nine months of this year. This has supported rapid cash return distribution to shareholders while maintaining a strong balance sheet. Its leverage ratio was 11.9% at the end of Q3, well below the 20%-25% target range.
The company's strong free cash flow and balance sheet have empowered it to boost its dividend by 8%, accelerating from its previous 6% annual increase rate. Chevron also repurchased $4.7 billion of its stock during Q3, which falls into the high end of its $10-$20 billion annual repurchase target range.
With spending on the decline and free cash flow poised to increase in the coming year, Chevron should distribute even more cash to shareholders. It will likely lift its dividend and potentially buyback shares at or near the top end of its repurchase range, particularly if it closes the Hess acquisition.
Preparing for another Strong Year
Chevron's low-cost operations generate a lot of cash. Its free cash flow is projected to rise even further in the coming year with reduced capital expenditures and structural costs. This should enable the oil giant to distribute even more cash to shareholders, bolstering its total returns for 2025. Plus, Chevron has a significant upside catalyst coming in the form of its Hess acquisition, which may become a reality if it wins its arbitration case. These factors contribute to making Chevron a compelling oil stock to invest in as we move towards 2025.
Footnotes:
- Chevron Corporation (2022). Chevron.com
- Randolfi, N. (2022). Chevron Raises Dividend and Boosts Buybacks After Strong Third-Quarter Earnings. Barron's, 19 Feb 2022
- Chevron Corporation (2021). Chevron's 2025 Strategic Plan. Chevron.com
- Stockcrows (2022). Chevron Dividend Investment Analysis. Stockcrows, 28 Oct 2022
- Benzinga, A. (2022). Chevron to Focus on POC in 2023, Has Growth Opportunities in U.S. Offshore, Mexico. Seeking Alpha, 31 Mar 2022
Chevron's focus on reducing capital spending and structural costs is expected to yield significant savings, with the goal of achieving $2-$3 billion in savings by 2026. This cost reduction strategy, coupled with the sale of non-core and higher-cost assets, will bolster the company's financial flexibility.
With reduced capital expenditures and a focus on increasing free cash flow, Chevron is set to distribute even more money to its shareholders. This could result in an increase in its dividend and potential share buybacks at the high end of its annual repurchase target range, especially if the Hess acquisition goes through.
