I chose to augment my Chevron stock portfolio further and anticipate further investments in this oil titan come 2025.
I've been consistently purchasing shares of Chevron (CVX -0.65%) for a few years now. The primary factor is Chevron's substantial dividend, which provides me with a continually growing passive income source. However, this isn't the only reason. I believe Chevron has the capacity to generate solid total returns in the upcoming years.
Let's delve deeper into why I can't seem to get enough of Chevron stock.
A lucrative income stream
Chevron is a renowned dividend stock. It has boosted its dividend for an impressive 37 consecutive years, the second-longest streak in the U.S. oil industry, trailing only ExxonMobil. Over the past five years, Chevron has delivered superior dividend growth, including an 8% increase this year. At present prices, Chevron's dividend yields an impressive 4.5%, significantly higher than the S&P 500's 1.2% dividend yield.
The company has ample funds to pay out its dividend. It produced $22.8 billion in cash flow from operations in the first nine months of this year, enough to cover both its dividend payments ($8.9 billion) and its capital expenditures ($12.1 billion) with plenty to spare. Chevron also returned $10.5 billion to investors through share repurchases. Despite all this, its debt-to-asset ratio was still a manageable 11.9%, well below its target range of 20% to 25%.
Chevron has proven its ability to withstand economic downturns. It can continue funding its capital spending plan and a growing dividend through 2027, even if Brent crude prices (the global oil benchmark) drop from their current levels in the low $70s to $50. It would still have the financial flexibility to buy back shares at the lower end of its $10 billion-$20 billion annual target range.
Strong growth with a high-octane upside catalyst
Chevron is investing heavily in expanding its highest-return resource positions, such as the Permian Basin in west Texas and southeastern New Mexico; the Gulf of Mexico; and Kazakhstan. These investments position the company to increase its production by over 3% annually through 2027. Meanwhile, these high-return investments into more profitable areas should drive a more than 10% compound annual growth rate in its free cash flow during that period, assuming Brent oil averages $60 per barrel. At $70 per barrel, Chevron would generate enough cash flow from operations to fund its capital program, a growing dividend, and share repurchases at the top end of its range without resorting to its balance sheet capacity.
Chevron has another significant upside catalyst in the works, potentially happening in 2025. It agreed to acquire Hess (HES 0.10%) for almost $60 billion at the end of 2023. However, this deal has encountered obstacles due to Exxon's belief that it triggers a change-of-control clause in its joint venture with Hess and a Chinese oil company (CNOOC) in Guyana. Exxon is attempting to block the deal to potentially increase its stake in the world-class oil field in Guyana. The two oil giants are currently engaged in arbitration over this matter, which should reach a resolution in 2025.
If Chevron prevails, it will be able to complete its strategic acquisition of Hess, adding a position in Guyana to its portfolio and one in the Bakken shale play in North Dakota while strengthening its existing operations in the Gulf of Mexico and Southeast Asia. Acquiring Hess will extend Chevron's production and free cash flow growth outlook into the 2030s. The deal would more than double Chevron's free cash flow by 2027, assuming oil averages $70 per barrel.
Given my ongoing interest in Chevron's stock, I've been considering diversifying my portfolio by investing some of my money in other sectors. However, the allure of Chevron's financial stability and promising growth prospects keeps drawing me back.
Furthermore, the potential acquisition of Hess could greatly enhance Chevron's financial position and production capabilities, making it an attractive opportunity for those interested in finance and investing.
