How Is The Slump In Oil Demand Weighing On Chevron Stock?

Chevron Corporation (NYSE: CVX) reported a 65% (y-o-y) decline in the second quarter revenues, mostly due to a sharp decline in benchmark oil prices and depressed refinery margins. The company has announced a third quarter dividend of $1.29 per share despite its second quarter operating cash flow nearly touching negative territory. For the first six months, Chevron’s $6.4 billion of dividend payout and share buybacks were supported by $7 billion of debt raises. Will CVX maintain its dividend per share amid an uncertain demand environment? The company’s international peers, Royal Dutch Shell and BP have slashed their quarterly dividend by 65% and 50%, respectively. Trefis highlights the key factors driving -26% change in Chevron’s stock since 2017 in an interactive dashboard analysis.

Chevron’s upstream volumes supported by low production costs in the U.S.

Consistent with the long-term target of low single-digit growth in production volumes, Chevron’s Revenues have increased by 3.4% from $141 billion in 2017 to $146 billion in 2019. The U.S., Africa, Asia, and Australia contribute 36%, 14%, 23%, and 18% of the company’s total upstream production volumes, respectively. As production costs (per barrel) are 10-15% lower in the U.S. than Africa and Asia, higher domestic production improves margin efficiency. Chevron’s upstream production in the U.S. increased by 10% while it declined at other international locations, primarily due to government-mandated cuts. Interestingly, the company expects its net production to remain relatively flat in 2020 despite EIA’s expectation of an 8% contraction in demand.

Will the company be able to maintain positive operating cash?

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With WTI and Brent likely to remain under $40 per barrel in the near-term, the company is expected to observe earnings erosion for a couple of quarters. The second quarter operating cash flow stood at just $80 million, positively affected by working capital adjustments. For the six months ending in June, the company generated $4.8 billion of operating cash which supported $4.4 billion of investing activities. Thus, a production cut in the U.S. due to high commercial crude oil inventory levels will have a sizable impact on operating cash and capital expenditure targets. Also, if the company increases its long-term debt to support its dividend policy, then the trailing P/E multiple could contract further and negatively impact the stock price.

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