Despite a challenging environment for crude oil futures, Chevron Corporation (NYSE) has shown resilience and outperformed the S&P 500. This article explores why Chevron remains a sound investment and evaluates its performance through key metrics such as free cash flow yield, return-on-invested-capital (ROIC), and EV/EBITDA valuation.
How Can We Measure This?
Chevron’s performance should be evaluated by focusing on metrics that provide meaningful insights. For Chevron, I consider the following:
- Free cash flow yield
- ROIC
- EV/EBITDA valuation
Free Cash Flow Yield
Chevron’s ability to generate free cash flow is a crucial indicator of its financial health. Free cash flow yield is calculated by dividing trailing twelve months (TTM) free cash flow by market capitalization.
Free Cash Flow Yield (TTM) – Chevron and Peers
| Company | Market Cap ($B) | FCF ($B) | FCF Yield % |
|---|---|---|---|
| Chevron | 292.0 | 24.8 | 8.5 |
| Exxon Mobil | 415.0 | 36.0 | 8.7 |
| Shell | 204.0 | 22.2 | 10.9 |
| TotalEnergies | 152.0 | 17.1 | 11.3 |
| BP | 120.0 | 14.0 | 11.7 |
Chevron’s free cash flow yield is competitive but slightly lower than some peers, indicating a solid but not leading position in generating free cash flow relative to market cap.
Return-on-Invested-Capital (ROIC)
ROIC is a critical metric for assessing how well a company generates returns on its investments. For Chevron, I use a comprehensive approach, considering equity, long-term debt, and other significant investments.
Return-on-Invested-Capital (TTM) – Chevron and Peers
| Company | ROIC % | WACC % |
|---|---|---|
| Chevron | 7.5 | 6.0 |
| Exxon Mobil | 10.0 | 6.2 |
| Shell | 9.5 | 6.1 |
| TotalEnergies | 8.7 | 6.3 |
| BP | 8.0 | 6.4 |
Chevron’s ROIC is lower than some peers but still above its WACC, indicating that it is creating value for shareholders.
Enterprise Value-to-EBITDA Valuation
EV/EBITDA is a useful valuation metric that considers both equity and debt, providing a clear picture of a company’s valuation.
EV/EBITDA (4-year average) – Chevron and Peers
| Company | EV/EBITDA |
|---|---|
| Chevron | 7.8x |
| Exxon Mobil | 8.6x |
| Shell | 6.7x |
| TotalEnergies | 6.9x |
| BP | 7.2x |
Chevron’s EV/EBITDA is competitive but not the highest among peers, reflecting its strong but balanced valuation.
Discussion
Chevron has demonstrated resilience despite recent oil market volatility. Its solid free cash flow yield, positive ROIC, and reasonable EV/EBITDA valuation suggest it is well-positioned in the market. Key factors driving this include robust production in the Permian and DJ Basins and the strategic acquisition of Hess Corporation.
Risks and Considerations
- Oil Price Volatility: Recent declines in oil futures could introduce downside risks.
- Long-term Energy Transition: The shift to renewable energy poses long-term challenges.
- Arbitration with Exxon Mobil: Uncertainty remains over the arbitration outcome, which could impact Chevron’s valuation.
Summary
Chevron continues to generate solid free cash flow and maintain a healthy ROIC. Despite market volatility, its strategic assets and disciplined capital allocation make it a compelling investment.
Rating: Maintain Buy.
Key Takeaways:
- Free Cash Flow Yield: Competitive but not leading.
- ROIC: Positive and above WACC, indicating value creation.
- EV/EBITDA: Reasonable valuation compared to peers.
Chevron remains a robust investment with the potential for further upside, especially if the arbitration with Exxon Mobil concludes favorably.
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