Where Will Chevron Stock Be In 1 Year?

What Happened In The Fourth Quarter?

It was a tale of two halves for Chevron’s last reporting period of the year, with the company announcing it had delivered unprecedented adjusted earnings of $36.5 billion in 2022.

And yet, despite increasing its quarterly net income by 25% to $6.4 billion, this was down sequentially from the $11.2 billion CVX made in the three months that ended September 20, 2022.

More worryingly, perhaps, the firm also missed analysts’ expectations on this vital metric by $0.20 per share, although it did beat Wall Street’s revenue consensus by $2.5 billion, bringing in a total of $56.5 billion.

However, with uncertainty over how the energy markets might perform in 2023, what concrete factors will affect Chevron’s prospects as the year rolls on?

Green Energy Could Be A Major Growth Accelerator

With adherence to environmental, social, and governance matters taking precedence in the modern climate, it’s natural that pursuing a strategy of lowering emissions and prioritizing energy-efficient technologies will help CVX remain competitive over the coming decade.

Indeed, Chevron’s 2021 Climate Change Resilience report outlines its plans to invest in green alternatives and help meet the global net zero ambitions of the Paris Agreement.

Hence, one of the firm’s long-term fundamental approaches is to create “affordable, reliable, and ever cleaner energy.”

In fact, the company’s commitment to understanding and evaluating opportunities across a range of alternative energy sources has already led to the development of its Renewable Diesel Blend, a fuel that’s composed of 80% sustainable diesel, as much as 20% bio-diesel, and no more than 1% regular petro-diesel.

Furthermore, Chevron’s focus on other renewables – such as wind, solar, and geothermal – will help diversify the company, allowing it to take advantage of new opportunities in the sector.

Most crucially, however, these novel fuel sources could help drive profits for the business as the company looks to capitalize on the growing demand for cleaner energy.

Climate Agenda Comes With Risks

While its commitment to green energy is an essential first step in ensuring the company’s long-term financial sustainability, the shift to renewables could potentially lower Chevron’s revenues rather than increase them.

In fact, although CVX invests in low-carbon technologies, these endeavors have a relatively small impact on its overall carbon emissions.

Indeed, despite being one of the leading renewable fuel producers in the United States, the 519 million gallons of renewable energy produced by REG – Chevron’s recently acquired bio-refinery operator – only amounts to 4.2 million tonnes of carbon reductions, or 0.01% of the worldwide total. This is a tiny fraction given that the industry accounts for 50% of global emissions, suggesting that CVX’s efforts are unlikely to make a significant impact after all.

On top of that, with Chevron’s current revenue streams heavily reliant on oil and gas, its stated desire to support climate policies resulting in a price on carbon will further disincentivize the firm from using fossil fuels, thus eroding its top line even more.

Finally, the cost of transitioning to clean energy is likely to have a deleterious effect on its bottom line, as Chevron will need to divert funds from other segments and verticals to cover the costs of such actions. This could mean the green transition puts a strain on its immediate profits, leading to an unanticipated decrease in earnings in the short term.

Is CVX A Buy?

At first sight, Chevron’s decision to raise its dividend for the 36th straight year in a row seems great for shareholders, with a 6% increase generous by anyone’s standards.

Moreover, the board’s commitment to repurchase $75 billion worth of shares in the next year is, again, another apparent win for supporters of the stock.

However, returning value in this way might be reckless at the present time. For instance, it’s clear from the company’s earnings breakdown that the majority of its profits from 2021 to 2022 came from its positive upstream price realizations. To be precise, $16.4 billion of the extra $19.8 billion – or 83% – that Chevron made was due to the simple fact it could charge more for its product in 2022 than it could the year before.

Unfortunately, the chances that the firm can repeat this feat in 2023 look increasingly slim. There’s the real possibility of a recession sometime in the near future, and, if demand and economic activity should dwindle, then so too will Chevron’s bottom line.

Indeed, those stock buybacks could also leave a bitter aftertaste, especially if the business overpays at today’s market prices before a fall later on.

All in all, despite Chevron’s attractive valuation at 11x its forward earnings, the enterprise is almost certainly going to face headwinds it didn’t have to contend with over the last twelve months.

With uncertainty surrounding the outcome of Russia’s Ukraine invasion – not to mention the Fed’s own war against inflation – now is not the time to open a position in CVX. Perhaps wait another year, when hopefully the macro picture is clearer.