Chevron's mixed quarter doesn't tell the full story of why we own the stock

Published Fri, Apr 29 20223:13 PM EDT

Chevron (CVX) reported mixed first-quarter results before the opening bell on Friday. However, we don't think the headline numbers tell the full story. Instead, we believe our Chevron investment thesis predicated on increased capital discipline and an intense focus on sustainable shareholder capital returns throughout the commodity cycle remains fully intact. Bottom line Shares were under pressure on Friday's release, but we believe the weakness in Chevron — should it continue from here — would be a buying opportunity. We think things get interesting down at the $150 per share level. Our cost basis on the stock is $114.32 per share. Catalysts for owning Chevron include elevated commodity prices, management raising Permian production guidance, intentions announced Friday to run share repurchase activity at record levels that they believe sustainable throughout the commodity cycle, not to mention the stock's robust 3.6% dividend yield. Companywide Q1 results Chevron reported adjusted earnings of $3.36 per share for the quarter, a miss versus the $3.42 consensus despite strong topline results. The company reported earnings increased 350% year over year to $6.3 billion. Revenue rose nearly 70% year over year to $54.37 billion, handily beating expectations of $47.75 billion. Those year-ago comparisons were much wider than normal due to the worldwide slowdown in economic activity in 2021 resulting from the Covid pandemic, but speak to the incredible resurgence of demand the industry is now seeing. In addition to the mixed headline results, operating cash flow of $8.1 billion for the first quarter missed expectations of $10.65 billion while free cash flow of $6.1 billion missed expectations of $8.29 billion. While the free cash flow numbers missed the mark, this was the third consecutive quarter of free cash flow coming in over the $6 billion level. That provided management the ability to return $4 billion to shareholders and further paydown debt, resulting in a net debt ratio below 11% exiting the quarter. Buybacks ran at a $5 billion run rate in the first quarter — the lower end of the $5 to $10 billion range provided at the March Investor Day. However, management said they plan to double that rate going forward, closer to that $10 billion top of the range figure, which would be a company record. While they could buy back stock at an even higher rate, management said their intention isn't to maximize repurchases in any single quarter but rather to set the rate at a level they can maintain throughout the commodity cycle. We believe this once again speaks to the team's capital discipline and demonstrates a strong focus on providing smoothed out shareholder returns over the long-term, not only when commodity prices are elevated because of geopolitical tensions or anything else. Q1 revenue breakdown Chevron reports operations in two segments: upstream, which is the exploration and production of crude oil and natural gas, and downstream, which consists of the refining of crude oil as well as manufacturing and marketing. Upstream earnings came in at $6.93 billion, with about 47% of that coming from the U.S. and the remainder from international markets. During the quarter, global upstream production of net oil-equivalents was 3.06 million barrels per day (bpd), slightly above the 3.04 million bpd the Street was expecting, with U.S. production advancing 10% annually and international production declining 8% versus the year ago period. Notably, unconventional production in the Permian Basin grew to a record 692,000 barrels of oil equivalent per day in the quarter, and management raised their 2022 guidance to 700,000 to 750,000 barrels per day, representing a 15% increase from 2021 levels. Taking a looking at average realized prices, Chevron realized $77 and $93 per barrel of crude oil and natural gas liquids in the U.S. and internationally, respectively. This leads us to a weighted average realized price of approximately $85.48 per barrel, slightly below the $86.10 the Street was anticipating, however, a significant increase versus the $52.10 realized price in the year ago period. On the natural gas front, Chevron $4.10 and $8.87 per thousand cubic feet in in the U.S. and internationally, respectively. Once again, averaging this out on a weighted basis leads us to a globally realized price of roughly $6.63 per thousand cubic feet, well ahead of the $5.80 the Street was expecting. Downstream earnings came in at $331 million as U.S. earnings of $486 million were offset by a $155 million loss internationally. In the U.S., Chevron benefited from improved profitability on refined product sales and higher earnings from its 50% stake in the Chevron Phillips Chemical Company. On the other hand, international earnings took a hit on higher operating expenses and reduced profitability on refined product that was compounded by a $36 million currency headwind. (Jim Cramer's Charitable Trust is long CVX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 1, 2022.

Brendan McDermid | Reuters