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Chevron can produce a lot of cash at the current oil price point.
The oil giant expects to produce significantly more free cash flow next year.
Its Hess acquisition extended its growth outlook into the 2030s.
Crude oil prices have fallen this year. Brent, the global benchmark, is down about 10% and just below $70 a barrel. Lower prices mean oil companies such as Chevron (NYSE: CVX) are producing less cash flow.
Although oil prices are currently below $70, now is still a good time to buy shares of Chevron. Here's why buying the oil stock makes sense now.
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Image source: Getty Images.
Chevron has built a resilient oil and gas portfolio. Its 2025 breakeven level is about $30 a barrel -- the lowest in the oil patch. At today's oil prices in the high $60s, Chevron can generate strong cash flow.
That was evident in the second quarter. Chevron generated over $8 billion in cash flow from operations and nearly $5 billion in free cash flow, at an average realized Brent price of $67.88 per barrel. That gave Chevron the funds to invest capital in sustaining and growing its business while returning over $5 billion to shareholders via dividends and share repurchases. That was the 13th straight quarter that Chevron returned at least $5 billion to shareholders.
Chevron's fortress-like balance sheet enables it to return surplus cash to investors during periods of lower crude prices. The company ended the second quarter with a net leverage ratio of less than 15%. That's comfortably below its 20%-25% target range and toward the low end of its peer group. This low leverage level gives Chevron ample financial capacity to continue investing and returning cash during weaker oil markets.
The global oil giant expects to produce even more cash flow in the future. Chevron recently completed major capital projects in Kazakhstan and the Gulf of Mexico (also known as the Gulf of America in the U.S.) that will contribute to increasing free cash flow over the next year. Additionally, the company recently achieved a milestone of producing over 1 million barrels of oil equivalent (BOE) per day in the Permian Basin. Its growing production in that key region will also supply it with increasing free cash flow in the coming years.
Chevron also aims to deliver $2 billion to $3 billion in structural cost savings by the end of next year. With these savings and rising production, it expects its legacy portfolio to deliver $10 billion in incremental annual free cash flow next year at a $70 Brent price, or $9 billion if Brent averages $60 in 2026.
Meanwhile, Chevron recently closed its megamerger with Hess. That acquisition should provide an additional free cash flow boost next year. Chevron expects to capture about $1 billion in cost synergies from the merger by the end of this year. Additionally, Hess' partner in Guyana (ExxonMobil) recently completed their fourth project in the region, boosting the total output to 900,000 barrels per day. These catalysts drive Chevron's view that the deal will add an incremental $2.5 billion in free cash flow next year at $70 oil.
Exxon recently approved construction of the $6.8 billion Hammerhead project in Guyana, set to be the seventh project in the region when it comes online in 2029. Exxon is also working toward approving an eighth project, anticipated to start production in 2030, which will increase combined output to 1.7 million BOE per day. These projects fuel Chevron's expectation of delivering sustained production and free cash flow growth well into the 2030s.
Chevron's growing free cash flow should support more cash returns to shareholders. The company has raised its dividend for 38 years, trailing only ExxonMobil. Chevron also plans to repurchase $10 billion to $20 billion of its stock annually, with buybacks toward the high end likely if oil prices remain near $70.
Chevron is approaching a significant inflection point in its free cash flow. New projects, cost savings, and the Hess merger could add up to $12.5 billion in annual free cash flow next year, even with only a slight rise in oil prices. Chevron aims to keep growing its cash flow and cash returns to shareholders into the 2030s. This visible and sustainable growth makes Chevron stock a strong buy these days, even with oil below $70.
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Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
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