Chevron Eyes More Buybacks After Record Cash Flow

Chevron Corp. is weighing more share buybacks while reining in spending after surging natural gas prices and oil-refining returns drove the U.S. supermajor’s free cash flow to an all-time high.

Chevron said Friday that third-quarter profit excluding one-time items was $2.96 per share, which surpassed every analyst’s estimate compiled by Bloomberg. Earnings were so strong that the driller’s net-debt-to-capital ratio has fallen below its target of 20% to 25%, a key threshold that could spur an increase in stock repurchases, Chief Financial Officer Pierre Breber said. 

Chevron shares rose 2.1% to $115.50 in pre-market trading.

“We’re fast approaching a net-debt ratio where we could increase our buyback guidance range even further,” Breber said in an interview.

Chevron also reduced its full-year capital-budget target to $12 billion to $13 billion from $14 billion, citing pandemic-related project deferrals and reduced costs in the Permian Basin.

The oil explorer has thus far avoided the attentions of activist investors like those that have targeted rivals Exxon Mobil Corp. and, more recently, Royal Dutch Shell Plc. Chevron Chief Executive Officer Mike Wirth is betting on a strategy of enriching shareholders and increasing fossil fuel production, while at the same time addressing climate concerns by lowering a controversial measure of carbon emissions.

Free cash flow of $6.7 billion in the quarter allowed Chevron to fund a dividend that’s among the top 10 in the S&P 500 Index, and reduce debt. But the company bought back just $625 million of shares in the period, the mid-point of its targeted range.

Under existing plans, the company aims to spend as much as $3 billion a year on repurchases. 

The crucial question for Chevron executives when they appear on a conference call with analysts later on Friday will be whether excess cash goes into boosting crude and gas production in 2022. A big reason why oil supermajors are generating record cash flow is because of deep budget cuts made during the pandemic-driven oil-market collapse of last year. 

Chevron’s year-to-date spending was 22% lower than the year-earlier period. 

But with record natural gas prices in Europe and Asia, and robust crude prices everywhere, there are growing incentives to increase investments in fossil fuels. Chevron, though keen to balance its core businesses with growing environmental pressures, can quickly ramp up shale production in the Permian Basin should it wish to do so. 

Chevron’s pumped the equivalent of 3.03 million barrels a day during the quarter, an increase of 7% from a year earlier, aided by the purchase of Noble Energy in October 2020.  

The company’s executives will begin a conference call with analysts at 11 a.m. New York time.