Chevron

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global integrated energy company, primarily engaged in oil and gas exploration, production, transportation, and refining operations, along with a growing focus on lower carbon alternatives.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Moat Analysis: Chevron’s competitive advantage, while not a wide, durable moat is rated at a 3/5 with the belief that they can produce an above-average, albeit volatile, level of returns on invested capital (ROIC) in the near to medium term. This assessment stems from a combination of factors:

  1. Scale and Cost Advantages: Chevron benefits from its massive scale and infrastructure, which allows for cost efficiencies, especially in upstream operations like oil and gas extraction. They have a global production network that allows them to operate in various parts of the world at varying economic circumstances and geopolitical considerations. However, they operate in commodity businesses, so their cost advantages are not entirely a moat because other similar firms also enjoy some of these.
  2. Economies of Scale in Natural Gas: Chevron has a large-scale liquified natural gas business that enables it to supply customers globally. It also means its pipeline distribution network which is tough and complex, making it hard for competitors to compete head-to-head.
  3. Brand Recognition: Chevron is a known brand within the energy space, recognized for its operations, products, and services, they have a large customer base that is familiar with them.
  4. Intangibles: Chevron benefits from patents and technological expertise in some areas, particularly in chemical technology, which offers a somewhat sustainable advantage over competitors. However, it is not as big as other firms that benefit more from their intangible assets.

These advantages give Chevron a ‘moat’, however, they aren’t as durable as a strong brand in the consumer segment, and not as wide as they are in the software industry, therefore, it can only be considered a medium moat. They’re not immune to competition or major fluctuations in crude oil/natural gas prices.

Risks to the Moat and Business Resilience: Chevron faces several legitimate risks that could harm its moat and business operations:

  1. Commodity Price Volatility: The most significant risk is the volatility of oil and natural gas prices. As a commodity producer, Chevron is susceptible to fluctuations in these prices which can directly affect revenue and profitability. A sudden drop in prices could lead to a substantial loss, even if operational costs are kept under control. This is a cyclical business.
  2. Regulatory and Political Risks: As an energy company, Chevron operates under complex regulations that can differ between different jurisdictions. Government policies, taxes, tariffs, and regulations have the ability to affect profitability. The government can make policies that are favorable to them, or otherwise unfavorable.
  3. Geopolitical Instability: Chevron operates across diverse geographic regions, including politically unstable areas. Conflicts, wars, and government actions can disrupt operations and create supply chain challenges. This creates an operational risk for their supply and production lines.
  4. Technological Disruption: While having a position in new energy alternatives like renewable fuels, carbon capture, and hydrogen, Chevron faces potential disruption from rapid technological change in the energy sector.
  5. Climate Change and ESG: Chevron faces pressure from the public and governments due to climate change. Climate regulations, carbon taxes, and policies affecting their ability to operate and expand, which also makes ESG compliance a serious challenge.
  6. Transition to Renewable Energy: The world is transitioning towards renewable energy sources, but that poses challenges to Chevron’s traditional business model. The future requires strategic changes in their operations, business practices, and more investment in renewable energy.
  7. Operational Risks: Accidents, unforeseen circumstances, supply chain disruption or other operational problems and cost overruns may affect their bottom line.
  8. Cybersecurity Risks: Cyber attacks and data breaches can disrupt operations, cause leaks or loss of data, or even regulatory fines. The company needs to have strong cybersecurity measures to counter these risks.

Despite these risks, Chevron is a large company with an established track record, a diverse portfolio and operations, along with an impressive financial performance, giving it the ability to navigate through these issues.

Detailed Business Explanation Chevron is a global integrated energy company with operations in over 100 countries that primarily include:

  • Upstream: This segment is primarily in exploration, development, and production of crude oil and natural gas, including natural gas liquids. This includes all the activities required to locate, develop and produce from new and existing fields, including seismic and geological studies, and drilling and well production.
  • Downstream: Refining crude oil and other feedstocks into petroleum products, marketing, and transportation of crude oil and refined products, including the operation of refineries and the distribution of refined products for sale. This includes fuel and lubricants as well. They provide a range of products to retail locations, gas stations, and industrial customers.
  • Chemicals: Chemicals are produced by refining and selling into various chemical products for industrial purposes. This includes the manufacturing and marketing of petrochemicals, plastics, and chemical intermediates.
  • New Energies: They are expanding into renewable fuels, carbon capture, and hydrogen technologies.

Revenue Distribution: Chevron’s financial performance is predominantly derived from upstream operations, with crude oil, natural gas, and natural gas liquids comprising the major portion of revenues. Although the company is diversifying into new energy and other sectors, the majority of its income still comes from production and sales of oil and natural gas.

Industry Trends: The oil and gas industry is constantly evolving. Key trends include:

  • A significant demand for oil and gas, despite pressure to reduce carbon emissions,
  • Increased investment in renewable energy production and technologies,
  • Growing demand in emerging economies,
  • Technological developments in fracking and deepwater extraction,
  • Intensifying government regulations.

Competitive Landscape: Chevron operates in a highly competitive market. It faces competition from other supermajors such as ExxonMobil, Shell, BP, and TotalEnergies along with a number of state-owned national oil companies. Competitors are focusing on efficiency, cost reduction and the transition to cleaner energy.

Differentiation: The combination of global operations, long experience and expertise, and investment in new energy technologies helps Chevron differentiate. But these aren’t unique characteristics, other big energy companies are also pursuing similar strategies.

Financials:

  • Revenue: Chevron had a record breaking revenue of $246.3 billion in the 2022 FY, a substantial increase from $162.5 billion in 2021. The increased revenues are directly attributed to high oil and natural gas prices and increased margins. However, revenues for 2023 have decreased by around 10% as the energy prices came down. The volatility is visible in revenues.
  • Net Income: Net income is also heavily reliant on commodity prices. For the first half of 2023 their net income was $18.1 billion compared with $15.6 billion in 2022 for the same period. The net income has decreased since 2022.
  • Profit Margins: Chevron’s operating and profit margins are susceptible to changes in the prices of oil and natural gas.
  • Cash Flow: Chevron has high cash flow from operations and is expected to continue to generate profits from its activities.
  • Debt Levels: While Chevron does carry debt, as well as lease obligations, it also has a substantial amount of cash reserves.
  • Investments and Acquisitions: Their investment decisions are mainly focused on core production assets, with more investments into new energies, which includes wind, solar, carbon capture, and hydrogen.
  • Dividends and Share Repurchases: Chevron has a history of dividend pay outs, and recently have been repurchasing significant number of stocks. These moves are to deliver value to shareholders while also reducing capital investment needs and expenses.

Recent Concerns / Controversies: Here is a highlight of some recent concerns, controversies, and problems faced by Chevron, as well as the measures taken by the management to respond to these problems:

  1. Price Volatility: The most talked about thing is that the oil prices are volatile, and Chevron has had great earnings in past few years, but their earnings have fallen lately as prices have corrected downwards. Management acknowledges that while they can’t control prices, they can manage their costs and operations.
  2. Carbon Emissions: Due to the nature of the business Chevron faces constant public scrutiny. There are concerns of their emissions and their impact on climate. Chevron’s management is addressing that through large investments in lower emission technology, carbon capture, and hydrogen.
  3. Windfall Profits: The energy industry has faced increased taxes and calls for windfall profit taxation as their earnings have been high. Management has discussed their plans to invest in their businesses, and return money to shareholders, and create long term value.
  4. Merger: Chevron entered into a merger with Hess corporation, and the merger is subject to regulatory approvals and shareholder voting. Management believes that the merger will lead to long term growth and value creation, and give significant synergies.
  5. Share Repurchases: The company is continuing its share repurchase program. This has drawn some criticism and it’s implications on the company’s cash reserves.
  6. Accusations of Environmental Degradation: Some stakeholders and authorities have alleged that Chevron is not acting responsibly towards environment and some areas that they are operating in. Management claims they do their best to protect the environment, and are working on improving environmental safeguards for all their operations.

Understandability: 3 / 5 While the basic business of Chevron (oil and gas production) is fairly straightforward to grasp, its operations are complex and span across various geographical regions and includes different economic and political conditions. The company operates in multiple business segments, making it more complex than just an upstream oil and gas producer. The financial statements are also complex and the underlying factors driving the market are numerous and can be overwhelming. The overall financial and operating data can be interpreted, but that requires some level of experience in financial analysis and economics. Therefore, I would rank understandability of the business as 3 out of 5.

Balance Sheet Health: 4 / 5 Chevron possesses a fairly healthy balance sheet. The company has significant financial reserves and is generating high free cash flow. Its current assets exceed its current liabilities, they have a low short term debt and manageable long term debt, and possess a good equity base. Their asset base can be sold for reasonable value if ever required. However, the company does have high level of indebtedness and large investment levels. Overall, its financial position appears healthy, but that could be impacted if any major shift occurs in energy prices, a recession, or major policy changes that directly affect them. Therefore, I would rate their balance sheet health a 4 out of 5.