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Chevron's Near-Term Outlook Is Limited Amid Volatile Oil Prices

Oil and gas stocks have shown remarkable growth in 2022, and Chevron Corp. (NYSE:CVX) has been a leader of the apck. The company has an impressive balance sheet and produced strong results in the previous few quarters. On top of that, Chevron is a top pick among income investors due to its hefty dividend payments, which is made possible due to its superior financial strength in an industry where many companies are barely hanging on while drowning in debt.

However, it is worth noting that Chevron looks overvalued at the moment after the recent runup in its stock price. This does not mean that I think the stock is a bad investment - it still has top-of-the-industry fundamentals and shareholder returns. However, oil is a heavily cyclical industry, and it is already coming off its cyclical peak that was kicked off by the beginning of the Russia-Ukraine war. While there could still be some boosts to oil prices left in the cards due to factor such as OPEC cutting production again, the price per barrel has been on a steady downtrend since June.

From strength to strength

In the third quarter of 2022, Chevron reported 49% year-over-year growth in revenue to $66.64 billion. Revenue outclassed analyst estimates by $5.2 billion. Moreover, the net income for the quarter stood at $11.2 billion or $5.78 per diluted share, compared to $6.1 billion, or $3.19 per diluted share, in the same period a year ago.

The revenue and net income showed substantial year-over-year increases, but both numbers were down sequentially even after increased production. The decrease was due to a reduction in average liquid price to $75.75 per barrel of oil equivalent, compared to $88.71 per barrel in the previous quarter.

The company's cash flow from operating activities increased by $1.49 billion to $15.3 billion year-over-year. Furthermore, the free cash flow almost doubled from the third quarter 2021 period to $12.27 billion and increased by approximately $1.67 billion from the previous quarter.

Thanks to substantial cash reserves, the company has focused squarely on reducing its debt for the past six quarters. The company's total debt peaked in the first quarter of 2021 at $45.44 billion; in the third quarter of 2022, it was down to $23.64 billion. This shows great management of cash flows and helps to put at rest any fears that the company's balance sheet might become precarious in a future industry downturn.

An income investor's delight

Chevron is one of the companies that does not shy away from healthy shareholder returns. The company distributed $6.5 billion to its shareholders in the third quarter of 2022. paying dividends per share of $1.42 and repurchasing $3.75 billion worth of shares.

Chevron is a dividend aristocrat that has increased its dividends for the past 35 years. The company's dividend yield is 3.11% and its payout ratio is 0.32 as of Dec. 2. Chevron's dividend aristocrat status and long history of dividend increases will make it attractive to income investors. This is a remarkable achievement for a cyclical company. In addition, the company's high dividend yield and relatively low payout ratio suggest that its dividends are sustainable.

Despite the economic turmoil of recent years, Chevron has continued to pay its quarterly dividend without interruption. This commitment to shareholders has not been easy, as the company has had to weather recessions and a global pandemic. However, Chevron has maintained its dividend thanks to a disciplined approach to spending and a strong focus on cash flow generation.

This commitment has been one of the key drivers of the company's long-term success, and shareholders can be confident that Chevron will continue to pay its dividend even during tough times.

Chevron is investing in renewable energy sources

Even though renewable energy will take a significant amount of time to replace fossil fuels completely, it is beneficial to take a chunk of the market share earlier because in the ultra-long-term, fossil fuels will either become obsolete or run out (whichever comes first). Chevron took a step towards its 100,000 barrels per day of renewable fuels by 2030 target after the announcement that it intends to acquire Renewable Energy Group (REGI).

Additionally, in October, Chevron announced a joint investment with California Bioenergy to produce market dairy biomethane as a renewable natural gas transportation fuel in California.

In mid-November, the company announced that it signed a definitive agreement to acquire Beyond6, including all of its 55 compressed natural gas stations across the U.S.


The stock market is always changing, and even the savviest investors can be caught off guard. Such was the case when the pandemic hit, and Chevron's stock took a nosedive. However, the stock has since made a remarkable recovery and is now trading at an all-time high. Much of this success can be attributed to the oil and gas price boom, which has helped to drive up demand for Chevron's products. While there is no doubt that the company is doing well, I believe that the stock may be slightly overvalued given current volatility and a potential cyclical downturn.

This article first appeared on GuruFocus.