Chevron Corp. plans to hand investors billions of dollars more than it did during the heyday of $100-a-barrel crude as the U.S. company ramps up oil output in the Permian Basin.
In a surprise move, Chief Executive Officer Mike Wirth pledged Tuesday to lavish as much as $80 billion on dividends and share buybacks over the next half decade. The projected returns exceed levels paid out in the years preceding the worst-in-a generation 2014-16 market collapse.
The key driver of those returns will be crude production from the Permian Basin of West Texas and New Mexico, which is expected to double over the next five years and eventually account for a third of the company's global output.
The targets, unveiled by Chevron at its annual investor meeting in New York, are illustrative of the high-wire balancing act facing big oil companies. The industry's largest companies are being asked to reinvest in production, reward shareholders and, at the same time, work through an energy transition that may spell the end of fossil-fuel growth within a decade.
Chevron's projected investor returns "look well supported by the balance sheet," RBC analyst Biraj Borkhataria said in a note to clients. The presentation "looks more like evolution than revolution, and continues the prior mantra around lower for longer capex [capital expenditures], and a steady uptick in Permian performance."
Chevron said it will save $2 billion with cost-cutting and margin improvements while holding annual capital spending to no more than 10% above current levels. Returns on capital will increase to more than 10% by 2024, up a third from current levels.
Returning cash to shareholders is "our number one priority," Wirth said. "This doesn't rely on higher oil prices. It relies on self-help to greater cost efficiency, continued capital discipline and effective portfolio management."
Chevron's returns have languished in recent years, far below where they stood a decade earlier. Exxon Mobil Corp. has seen a similar deterioration.
The Permian -- a vast, multilayered swath of oil that dominates North American crude production -- will be a key driver of Chevron's plan to improve performance, offering more than 20% profit for each dollar invested, said Jay Johnson, chief of the company's exploration and production business. Production will plateau at 1.2 million barrels a day by the mid-2020s with capital spending of about $4.5 billion a year.
The Permian targets show faith in a basin in which many explorers are struggling to generate cash after taking on debts to fund expansions and drilling. Chevron is insulated from those headwinds because it inherited most of its holdings in the region during the 2001 Texaco Inc. takeover.
With a strategy of emphasizing investor returns over production growth, Chevron is following the path laid down in recent years by ConocoPhillips. The strategy is a recognition that the world doesn't need ever-increasing volumes of oil and that shareholders need to be rewarded for owning fossil-fuel producers.
Last year, Chevron returned $13 billion in dividends and buybacks, equivalent to $65 billion on a five-year basis. The new goal of $75 billion to $80 billion is equivalent to almost half of Chevron's market value.
"To the general portfolio managers out there, if you're looking for cash, Chevron is the place to be," Chief Financial Officer Pierre Breber said during the presentation.
Information for this article was contributed by Javier Blas of Bloomberg News.
Business on 03/04/2020