Energy Market Report Card – Chevron Corporation (CVX)

Financial Report Card Summary

Figure 1: Chevron (CVX) Key Benchmark Performance Factors Compared to Peers

Figure 2: Chevron (CVX) Key Benchmark Performance Factors Compared to Self (3-years)


Company Profile

Along with its subsidiaries, Chevron Corporation is an upstream and downstream integrated energy, chemicals, and petroleum company with operations worldwide. The corporation is publicly traded on the New York Stock Exchange under the symbol CVX. Founded in 1879, the company was previously known as ChevronTexaco and changed its name to Chevron Corporation in 2005. The upstream segment focuses on the exploration, development, production, transportation, processing, storage, and marketing of crude oil and natural gas. The downstream segment is involved in crude oil, petroleum products, and lubricant refining, marketing, transportation, and manufacturing as well as marketing commodity petrochemicals, fuel additives, and plastics for industrial uses. Additionally, the organization is involved in cash management and debt financing, insurance operations, real estate activities, and technology businesses. Chevron is headquartered in San Ramon, California with a secondary U.S. office in Houston, Texas. Additional international offices exist in the U.K., Belgium, Canada, El Salvador, Greece, Liberia, Malaysia, Philippines, Singapore, and Thailand. Currently, Chevron Corporation employs about 50,000 employees throughout its various business operations.


Financial Analysis

As of December 31, 2020, Chevron Corporation reported $239.79 billion in assets with $107.06 billion in liabilities and $132.73 billion in total equity. This resulted in $94.47 billion in total revenue and a net income available to shareholders of -$5.5 billion for FY2020. These values can be seen in Table 5 and Table 6 representing a balance sheet common size analysis and an income statement index analysis, respectively. Additionally, Table 1 shows a peer comparison to benchmark Chevron Corporation against a few industry peers. Companies evaluated as peer organizations included Exxon Mobil (XOM), Marathon Petroleum Corporation (MPC), and BP p.l.c. (LSE:BP).

Several key financial ratios were evaluated for the companies and a competitor was calculated to create an average benchmark for Chevron’s performance. The main cross-sectional performance indicators that stood out for Chevron were the inventory turnover, average collection period, fixed asset turnover, receivables turnover, profit margin, return on assets (ROA), return on equity (ROE), and price-to-earnings (P/E) ratio. 

When looking at asset management ratios, the average collection period, 47.9 days, was above the competitor averages while the inventory turnover ratio, 8.8, fixed asset turnover ratio, 0.6, and receivables turnover ratio, 7.6, was below any of the competitors. These ratios indicate that Chevron is taking longer to collect revenue and is less efficient at collecting receivables than competitors which could impact efficiencies for reinvestment or paying off debt. The inventory turnover ratio is better than peers showing the company is better at replacing sold inventory, but Chevron may not be as effective at generating sales from its fixed assets.

Chevron’s profitability ratios were also significantly better than its peers, except for the price-to-earnings ratio (P/E). Return on assets (ROA), -0.9%, and return on equity (ROE), -4.0%, although both negative were smaller than the competitor average -2.5% ROA and -21.9% ROE. All companies had a negative P/E ratio, but Chevron’s -36.8 P/E dwarfed the -7.8 P/E competitor average. Upon further investigation, it is important to note that in the second half of 2020 Chevron completed its acquisition of Noble Energy in an all-stock deal with a total enterprise value of $13 billion, including debt [1]. This increased the total number of shares outstanding in Q4 2020 while net income was negative throughout most of 2020, both of which would have affected the P/E ratio. The profit margin for Chevron was also only -5.9% compared to the -13.5% competitor average. Even with poor commodity prices and reduced consumer fuel consumption in 2020, Chevron’s negative profit margin outperformed industry peers.

The financial ratios for Chevron were also compared against the previous two years, 2019 and 2018, and can be found in Table 2. In prior years the company had much better inventory turnover, average collection period, times-interest-earned (TIE), profit margin, ROA, ROE, P/E, and Altman’s Z-statistic. Over the last two years, the inventory turnover ratio was cut nearly in half while the average collection period increased by more than 10 days. Since the company did not generate positive EBIT in 2020 the TIE ratio was not calculated, but the 2019 ratio was 13.0 and the 2020 ratio was 19.0 indicating Chevron was very well positioned to cover its interest payments on debt. Over the last two years, profit margin also declined from 9.4% to -5.9%, likely due in large part to the downward pressure seen on commodity prices over the same period. As the net income decreased from $14.8 billion at the end of 2018 to -$5.5 billion in 2020, the ROA and ROE ratios also declined. From a DuPont system analysis, it can be identified that the large declines in profit margin compared to 2018 were the major driver in sub-par ROE. There have also been large swings in the P/E ratio from 14.1 in 2018, up to 70.8 in 2019, and back down to -36.8 in 2020. Additionally, Altman’s Z-statistic fell from about 3.25 in 2018 and 2019, indicating relatively little probability of financial stress in the next 2 to 5 years, to 2.24 in 2020 and into the “zone of ignorance” with no predictive power.

Common size analysis of the balance sheet and an index analysis of the income statement for Chevron Corporation were also performed for 2020 and 2019. The most notable information from the common size analysis in Table 5 is the long-term debt increased by about 8% from 2019 while retained earnings decreased by a similar amount. The result is an increased leverage shift for more total liabilities and less total common equity. On the asset side, gross property, plant, and equipment increased year over year by about 6%. These changes were likely related to the assets and liabilities Chevron took over to acquire Noble Energy in 2020. The index analysis for the income statement used the base year 2018 for comparisons over the next two years of operations and can be found in Table 6. It shows Chevron’s total revenue compared to 2018 decreased by 12% in 2019 and 40% in 2020, but the cost of goods sold also decreased by 15% and 47%, respectively. Other key changes to the company included a 100% increase in the impairment of oil, gas, and mineral properties for 2020, operating expenses decreased by 5% in 2020, and asset write-downs increased by 1,369% in 2019 and 280% in 2020. A summary of these key line items from the balance sheet and income statement can be found in Tables 3 and 4. Although earnings and net income were significantly decreased over the last two years compared to 2018, it appears to be heavily influenced by commodity price-related revenue declines and asset write-downs rather than increasing operating costs to the business.


Financial Summary

An analysis of several performance metrics benchmarked to competitors within the same industry as Chevron, comparisons of the company’s ratios over several years, common size analysis for the balance sheet, and index analysis of the income statement was performed. Due to commodity prices and reduced consumer demand for finished petroleum products, the industry did not perform well in 2020. Chevron outperformed competitors on profit margin, ROA, and ROE even with the downturn. Compared to prior years, the company declined on several metrics including inventory turnover, average collection period, and profitability ratios. The purchase of Noble Energy in 2020 and its associated debt was a likely driver outside of commodity-related impacts for the large P/E ratio swing, additional leverage on the balance sheet, and reduction in equity value. Additionally, large asset write-downs over the past two years appear to have impacted the company’s yearly earnings more than changes to the cost of goods sold or operating expenses. The company has made several moves that appear to have kept operational expenses in line with reduced revenue while maintaining a consistent debt ratio throughout the major acquisition in 2020. Assuming commodity prices continue a rebound further into 2021, it will likely be a major spark for restoring many of the financial components that had been lagging in the last three years.


Appendix Tables


Disclaimer

RARE PETRO Engineering and the author(s) of this article are not financial planners/advisors, attorneys, accountants, or certified financial analysts. The information in this post is from the personal research and experience of the author to be used for illustrative, educational, and entertainment purposes only and does not constitute financial, accounting, or legal advice. It is not a guarantee or a specific offer of products or services and shall not be understood or construed as financial advice. Past performance is not a guarantee of future return, nor is it an indicator of future performance. 

Please be aware that investing involves risk. Information provided in this article is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. It is also not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation. The information presented is believed to be factual and up to date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. RARE PETRO accepts no liability whatsoever for any loss or damage you may incur.


References 

[1] https://www.hartenergy.com/exclusives/chevron-completes-13-billion-takeover-noble-energy-190046

[2] https://www.sec.gov/ix?doc=/Archives/edgar/data/93410/000009341021000009/cvx-20201231.htm

[3] https://www.sec.gov/ix?doc=/Archives/edgar/data/0000034088/000003408821000012/xom-20201231.htm

[4] https://www.sec.gov/ix?doc=/Archives/edgar/data/1510295/000151029521000027/mpc-20201231.htm

[5] https://www.sec.gov/ix?doc=/Archives/edgar/data/0000313807/000162828021005241/bp-20201231.htm

[6] https://www.sec.gov/ix?doc=/Archives/edgar/data/0000093410/000009341020000010/cvx12312019-10kdoc.htm

[7] https://www.sec.gov/Archives/edgar/data/0000093410/000009341019000008/cvx12312018-10kdoc.htm

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