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Chevron's Brilliant Investment Strategy Could Pay Big Dividends in 2024 and Beyond

Motley Fool - Sat Dec 9, 2023

Chevron(NYSE: CVX) recently released its preliminary capital plans for 2024. The oil giant expects to increase its capital spending by about 11% next year. It's focusing on investing in projects that will deliver high returns and durable cash flow. That would give it more money to return to shareholders via dividends and stock buybacks. Here's a look at Chevron's plans for the upcoming year.

An acquisition-driven spending boost

Chevron plans to invest between $15.5 billion and $16.5 billion into organic capital projects next year. In addition, it sees capital spending at its joint ventures (CPChem and Kazakhstan) coming in at around $3 billion. That's about 11% higher than last year at the midpoint.

The company's budget doesn't include capital spending related to Hess(NYSE: HES), which Chevron agreed to acquire in October. The company expects that deal to close in the first half of next year. It sees its annual capital spending budget rising to a range of $19 billion-$22 billion following its acquisition of Hess.

One factor driving Chevron's capital spending increase is its recently closed acquisition of PDC Energy. Chevron expected to increase its capital spending budget by $1 billion per year following its deal for PDC Energy, boosting its range to $14 billion-$16 billion through 2027. It could eclipse the high-end of that range next year. However, the company also expected the deal to boost its annual free cash flow by $1 billion, assuming oil averages $70 per barrel (crude oil is currently in the mid-$70s).

Drilling for cash

Chevron plans to spend about $14 billion of its capital budget on oil and gas exploration and production projects. It will invest roughly two-thirds of that money into its U.S. operations, including about $5 billion into the Permian Basin. Chevron plans to invest another quarter of its capital into its Gulf of Mexico operations, including its Anchor project, which should start producing oil next year.

Chevron's focus on the Permian Basin is noteworthy. The company can earn high returns on capital employed (ROCE) and generate growing free cash flow.

A slide showing Chevron's improving returns and free cash flow from the Permian.

Image source: Chevron. ROCE = returns on capital employed.

Chevron's focus on drilling in high-return areas like the Permian has paid off over the years. It has delivered a peer-leading improvement in its ROCE over the last five years. The company expects to continue improving its ROCE over the next few years by investing capital into its highest-return operations, like the Permian. That's helping fuel strong cash-flow growth for the company. Chevron sees its free cash flow more than doubling by 2027 as it executes its investment strategy.

Chevron also plans to invest about $1.5 billion into downstream capital projects (e.g., refining) and about $2 billion on lower-carbon projects as it slowly grows out new energy business lines. Among its notable lower-carbon projects is its Geismar renewable diesel expansion project, which should start up next year. The company's growing lower-carbon energy platform could become a meaningful future free-cash-flow driver.

Generating more cash to return to shareholders

While Chevron is increasing its capital spending, CEO Mike Wirth stated it is "maintaining capital discipline in both traditional and new energies." It's focusing its investments on those that achieve attractive returns. Further, Wirth stated, "These investments are expected to underpin durable free cash flow growth to support our objective of returning more cash to shareholders."

Chevon's dividend is one aspect of its shareholder returns. The company has increased its payout for 36 straight years and grown the dividend at a peer-leading 6% annual rate over the last five years, including by 6% earlier this year.

The oil company expects to grow its dividend at an even faster rate next year, with plans to boost its payout by 8% in January. It could deliver higher sustained dividend growth in the future, fueled by its high-return capital investments and needle-moving Hess deal. Chevron can grow its free cash flow at a more than 10% annual rate through 2027 at an average oil price of around $60 per barrel.

Chevron also plans to ramp up its share repurchase pace. It expects to increase its annual share repurchase rate by $2.5 billion after closing its Hess acquisition, boosting its buyback to the top end of its $10 billion to $20 billion annual range. It could continue buying back shares at the upper end of that range if oil prices remain over $70 a barrel.

A well-oiled machine

Chevron plans to increase its capital spending next year. This investment spending should pay off in the future because it's focusing that capital on high-return projects that should produce growing cash flow. That will give Chevron more money to return to shareholders via dividends and repurchases.

This combination of increased cash flow and shareholder returns could give Chevron the fuel to produce attractive total returns in the coming years, making it look like an excellent oil stock to buy for the long haul.

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Matthew DiLallo has positions in Chevron. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.

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