Chevron Sees an Up to $8 Billion Free Cash Flow Gusher Ahead

Matt DiLallo, The Motley Fool

Sat, Jan 11, 2025, 3:44 AM 5 min read

Multiple growth catalysts

Chevron CEO Michael Wirth recently stated his belief that the company can boost its free cash flow by $6 billion-$8 billion by next year. That's a hefty increase. He outlined several catalysts that position the oil company to produce an even bigger gusher of excess cash over the coming years.

One notable driver is the Gulf of Mexico. Chevron is working to grow its output in the region from 200,000 barrels of oil equivalent per day (BOE/d) last year to 300,000 BOE/d by 2026. Just this week, Chevron and partner Shell started producing oil from their Whale facility. The project, 40% owned by Chevron, should reach a production peak of 100,000 BOE/d during its first development phase. Chevron also recently started production at its Anchor project and began water injection operations at two legacy fields to boost their output.

On top of that, the company expects to start up a new project in Kazakhstan this year. It also continues to develop its U.S. onshore assets in the Permian and DJ basins. High-margin production from these projects will help supply the company with additional cash flow.

Chevron is also working to reduce its expenses by "a couple billion dollars," stated Wirth. These cost cuts will fall right to the bottom line and boost its free cash flow.

Finally, despite a setback, Chevron continues to feel "very confident" that it will be able to close its needle-moving acquisition of Hess. While rival Exxon and China's CNOOC, Hess' partners in Guyana, have proven to be obstacles in closing the deal, Chevron believes it will win its arbitration hearing. It can promptly close its acquisition if it does.

Chevron initially anticipated that buying Hess would help it more than double its free cash flow by 2027, assuming $70 oil. Even without Hess, the company was on track to deliver more than 10% annual free cash flow growth during that period (which assumed $60 oil) due to the strength of its organic expansion projects.

What will Chevron do with all that extra cash?

Chevron already produces more cash than it needs to fund its operations and expansion. That's evident in its capital return program. During the third quarter, Chevron returned a record $7.7 billion of cash to shareholders, including about $4.7 billion in repurchases and paying roughly $2.9 billion in dividends. That exceeded its free cash flow ($5.2 billion), as the company used its strong balance sheet to return more money to shareholders.

Even with those additional debt-funded returns, Chevron ended the period with an 11.9% leverage ratio, well below its 20% to 25% target range. That percentage will trend down in the near term after the company agreed to sell its Canadian assets in a $6.5 billion deal, which is part of its strategy to sell $10 billion to $15 billion of noncore assets through 2028.

Given Chevron's low-leverage balance sheet, it will likely continue returning the bulk of its excess cash to shareholders. The oil giant will undoubtedly maintain its streak of increasing its dividend (over 35 straight years). It has delivered peer-leading dividend growth over the last five years, including giving investors an 8% raise in early 2024. It could continue to grow the dividend at an above-average rate.

Chevron will also likely aim to repurchase shares near the top end of its $10 billion to $20 billion annual target range. That's enough to retire about 6% of its outstanding shares each year at its current valuation.

Chevron will likely use any additional excess cash to further strengthen its already elite balance sheet. That would give it even more financial flexibility during the next oil market downturn. The company currently has the balance sheet capacity to fund its capital program, a growing dividend, and repurchase shares at the low end of its target range through 2027 if oil averages $50 a barrel.

A well-oiled machine

Chevron expects to add several billion dollars to its annual free cash flow over the next couple of years. That would give the oil giant even more money to return to shareholders through a growing dividend and meaningful repurchase program. That combination of growing cash flow and cash returns could give the oil producer the fuel to outperform its peers in the coming years.

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