Chevron Says Its Focus is on Protecting the Dividend
Chevron (CVX) this morning announced a series of actions to preserve capital in response to the unprecedented decline in oil prices. As part of the plan, management pledged to protect the dividend:
“Chevron’s financial priorities remain unchanged. Our focus is on protecting the dividend, prioritizing capital that drives long-term value, and supporting the balance sheet.” – Chevron CFO Pierre Breber
As we discussed earlier this month, Chevron has a very strong balance sheet and is one of the very few companies in the energy sector to earn a Safe Dividend Safety Score.
Here are the levers Chevron is pulling to preserve cash in this environment:
- Reducing 2020 capital spending plan by $4 billion, or 20%
- Reducing Permian production guidance by 20%
- Suspending share repurchases
- Continuing plan to remove reduce run-rate costs by $1 billion
Excluding 2020 asset sales and price related contractual effects, Chevron expects 2020 production to be roughly flat relative to 2019 as it goes into maintenance mode.
“The flexibility of our capital program allows us to respond to these unexpected market conditions by deferring short-cycle investments and pacing projects not yet under construction. At the same time, we are focused on completing projects already under construction that will start-up in future years while preserving our capability to increase short-cycle activity in the Permian and other areas when prices recover.” – Jay Johnson, Executive Vice President of Upstream
Chevron will still be borrowing to pay its dividend, and our previous estimate remains unchanged: thanks to its low leverage, the company appears to have at least one to two years' worth of balance sheet capacity to cover its cash flow deficit in this environment.
Management is willing to use some of Chevron's financial flexibility to keep income investors content until oil prices hopefully move higher. The company seems to share oil major Total's perspective that this pricing environment is unsustainable due to transitory factors at work, making them more willing to hold onto the dividend.
Total said recently that global oil demand is likely to fall by 6 million barrels per day (or about 6%) in April due to the spread of the coronavirus. Meanwhile, Saudi Arabia and its partners are increasing production by 3-4 million barrels per day.
Combined, that's an extra 10 million barrels per day on what Total describes as a "zero-demand" market. For context, world oil demand sat near 100 million barrels per day last year. That's why oil prices have collapsed to under $30 per barrel.
We plan to maintain our Safe rating on Chevron and will continue monitoring the firm's balance sheet runway potential. However, all of the oil majors will eventually need higher commodity prices to cover their production spending and dividends with free cash flow instead of debt.
