Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) continued to load up on energy giant Chevron (CVX, Financial) at the end of 2023, buying another 16 million shares in Q4. Chevron now accounts for about 5.4% of Berkshire Hathaway's investment portfolio, making it the firm's 5th largest holding. It was one of only three stocks that Buffet was adding to in the quarter.
Let's take a closer look at the Oracle of Omaha's top energy holding.
Company Profile
Chevron is an energy company that operates both upstream (E&P) and downstream (refining) businesses. The company's E&P operations own acreage throughout the world and produce oil, natural gas, and natural gas liquids (NGLs).
The company's downstream operations, meanwhile, mainly consist of its refinery and marketing operations. It refines and markets such products as gasoline, jet fuel, diesel, and fuel oil.
Chevron also owns midstream and marine shipping assets, as well as renewable fuel and chemical operations.
Opportunities & Risks
On the upstream side of its business, like most oil E&Ps the biggest driver of Chevron's results are oil prices. While for its downstream business, the biggest driver of results are crack spreads, or refinery margins. Neither of these Chevron has much control over.
Oil prices have remained mostly between $70-100 over the last few years, and currently sit just under $80. Most of the best oil basins in the U.S. have breakevens of $60 or under on new wells, so prices above $70 are typically good for the industry.
On the downstream side of the business, Chevron has enjoyed historically high crack spreads the last couple of years. While off their peak, spreads are still currently well above their historical average of around $10.50, with spring and summer futures in the high $20s pointing to another strong year for refiners.
One of the biggest areas of growth the company is targeting is the Permian, where it is looking to grow production a robust 10% this year. The Permian is the most prolific oil basin in the U.S. with some of the lowest breakevens, and Chevron has a large acreage position in the basin.
Outside the U.S., CVX is looking to greatly raise production in Kazakhstan through an expansion of its Tengizchevroil (TCO) project. The project's Full Gas Pressure (FGP) startup is expected in the first half of 2025, so its full impact likely won't be felt unil 2026.
Once its deal to acquire Hess (HES, Financial), which is expected to close in June, is complete its 30% stake in an offshore oil project off the coast of South American country Guyana is expected to be a huge growth driver. The project, operated by Exxon Mobil (XOM, Financial), has some of the best oil economics outside the Middle East, with estimated breakevens costs at about $28 per barrel.
When it comes to risks outside of oil prices and crack spreads, project delays and overruns are a big one. Its TCO project is complex, and the company has already run into a number of delays and cost overruns. Meanwhile, the company also faced infrastructure and operations issues in the Permian throughout much of 2023.
Chevron may also face some geopolitical risk in Guyana once its deal with Hess closes. There has been some fears that Venezuela could invade Guyana over a territorial dispute over the Guyana's newfound oil riches. The situation appears to have settled down, but the risk remains.
And then there is of course the long tail risk of the current energy transition to greener sources and where that will eventually leave energy majors such as Chevron. A transition like this will likely take many decades but Chevron and other energy companies will need to adapt in the future.
Valuation
Chevron trades at about 5.7 times the 2024 Ebitda consensus of $53.39 billion and about 5.2 times the 2025 Ebitda consensus of $59.09 billion.
Revenue is projected to grow 4.9% this year.
Historically, the company has averaged an EV/Ebitda multiple of between 6-9x.
I'd value the company in the middle at between 7-8 times 2025 EBITDA. However, some adjustments do need to be made to account for its acquisition of Hess. The deal will add about $8 billion in net debt to its enterprise value as well as close to 313.5 million new shares. Taking that into account, it would place a fair value on the company at around $175-205 based on a 7-8x multiple on 2025 EBITDA.
Conclusion
Chevron has been operating in a strong refinery environment and attractive oil price market the past couple of years, which in turn has led to solid results and a lot of cash flow generation. Its acquisition of Hess and its prized Guyana asset should only bolster the company's production and cash flow moving forward.
The company returned a record $26.2 billion in cash to shareholders last year, including $11.3 billion in dividends and $14.9 billion in share repurchases. This was all while seeing record production. Chevron has a long history of raising its dividends, increasing it for 37 straight years. The stock has a nice 4.2% yield and I'd expect this streak to continue into the foreseeable future.
At some point I'd expect crack spreads to return to more normal levels. However, changes in trade flow from sactions associated with the Russia-Ukraine war, now combined with shipping disruptions in the Red Seas, could see these spreads stay elevate for quite a while.
All of this is good news for Chevron and its largest shareholder Warren Buffett (Trades, Portfolio).
