Chevron(NYSE: CVX) is already a free cash flow machine. The oil giant produced $5.7 billion in cash last quarter. Those funds and its strong balance sheet enabled the company to return a record $7.7 billion to shareholders via dividends and repurchases.
The oil company aims to produce even more cash next year, which would give it more money to return to shareholders. Here’s a look at Chevron’s plans for the upcoming year.
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Chevron recently revealed its 2025 capital spending plans. The oil giant expects organic capital expenditures to be between $14.5 billion and $15.5 billion. In addition, it anticipates capital spending at its affiliates to be in the range of $1.7 billion to $2 billion. Overall, these spending ranges represent a $2 billion decline from Chevron’s capital spending in 2024.
The oil company expects to allocate about $13 billion of that capital on upstream projects (oil and gas production), with two-thirds aimed at developing its U.S. resource portfolio. Chevron plans to reduce capital spending in the Permian Basin to between $4.5 billion and $5 billion. It’s slowing production growth in favor of increasing its free cash flow. It will split the remaining money between the DJ Basin and the Gulf of Mexico, with the latter area on track to deliver several projects that will ramp its production in the Gulf by 300,000 barrels of oil equivalent per day by 2026.
Other notable investments include $1 billion on projects related to Gorgon LNG in Australia, $1.2 billion on downstream projects (refining), and $1.5 billion to lower its business’s carbon intensity and grow its new energies businesses. Chevron is also investing capital in its Kazakhstan joint venture in a project that will start producing oil in the first half of next year and to expand its chemicals joint venture with Phillips 66 (CPChem).
In addition to shaving its capital spending budget, Chevron is working to reduce some of its structural costs. The company previously set a goal to achieve $2 billion to $3 billion of cost savings by the end of 2026. To that end, the company expects to incur some near-term costs related to restructuring its business and selling non-core and higher-cost assets. It expects to record $700 million to $900 million in restructuring costs in the fourth quarter and $400 million to $600 million in impairments and other charges.
Some of those costs relate to the company’s portfolio optimization strategy. Chevron has agreed to sell its Canadian assets for $6.5 billion. It also agreed to sell assets in Congo and Alaska. These sales are part of a plan to divest $10 billion to $15 billion in higher-cost, higher-carbon assets by 2028. Those sales will enhance its financial flexibility. The company is also working to replace those assets with higher margins and lower carbon ones by acquiring Hess in a deal that could close next year. That needle-moving deal would enhance and extend its production and free cash flow growth outlook into the 2030s.
Chevron’s 2025 capital plan will exchange some production growth for greater free cash flow growth over the next year. The company is already producing a lot of cash. Its free cash flow after capital spending totaled $10.7 billion through the first nine months of this year. That has allowed it to return significant cash to shareholders while maintaining a strong balance sheet. Its leverage ratio was 11.9% at the end of the third quarter, well below its 20% to 25% target range.
The company’s strong free cash flow and balance sheet have allowed it to ramp up its cash returns to shareholders this year. It increased its dividend by 8%, accelerating from its roughly 6% annual pace in recent years. Chevron also repurchased $4.7 billion of its stock during the third quarter. That quarterly repurchase rate is toward the high end of its $10 billion to $20 billion annual target range for repurchases.
With its spending falling and free cash flow likely to rise next year, Chevron should return even more cash to shareholders. It will undoubtedly increase its dividend (it has raised the payout for over 35 straight years) and could repurchase shares at or near the top end of its target range, especially if it acquires Hess.
Chevron’s low-cost operations produce a lot of cash. It expects to generate even more free cash next year by cutting capital spending and structural costs. That should allow the oil giant to return even more money to shareholders, which could give it the fuel to produce strong total returns. On top of that, Chevron has a massive upside catalyst from its pending deal to buy Hess, which could finally happen next year if it wins its arbitration case. These factors combine to make Chevron look like a very compelling oil stock to buy as we head into 2025.
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Matt DiLallo has positions in Chevron and Phillips 66. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
