Oil futures had just started trading on Sunday night when I saw the news. Chevron (CVX) pre-announced second quarter earnings that are still due this Friday. Sort of. Partially. The real reason for the sneak peak at earnings was to announce several changes being made in the C-suite and to the firm's executive management.
At least in the early going on Monday morning, Wall Street seems pleased. You don't see major announcements made by headline level corporations very often on Sunday nights. Then again, the earth, the sea, the wind, and apparently Chevron are all subject to change.
On Sunday evening, Chevron reported preliminary adjusted earnings of $5.77B or $3.08 per share. A consensus of 15 analysts following the stock is for an adjusted EPS of $2.97, so that's a beat of about 6% on that metric, despite being down significantly both sequentially and on a year over year basis, largely due to fluctuations in underlying prices for crude.
The firm also announced that total production volumes landed at 2.959 MBOED (million barrels of oil equivalent per day). This bested central estimates by a little more than 6%. Permian Basin production printed at 772 MBOED, up 11% over the comparable year ago period, and was a new quarterly record. The frim states that this line remains on track to meet previously given full year guidance.
Management Shake-Up
Chevron is making a number of changes to its leadership team, while ensuring that leadership at the very top remains unchanged. First off, CFO Pierre Breber, will retire next year (in 2024). CTO (Chief Technical Officer) Eimear Bonner will assume that role effective March 1st. Breber had been with the firm since 1989, and in this role since 2019. Bonner has been with Chevron since 1998, and has been CTO since 2021.
In addition to those high-profile changes, current VP of Strategy and Sustainability Balaji Krishnamurthy will become VP of the firm's Technical Center, while current VP of the San Joaquin Valley Business Unit Molly Laegeler will become VP of Strategy and Sustainability. On top of that, current VP of M&A and Origination, Frank Mount, will become VP of Business Development.
Lastly, the firm changed its own rules, doing away with a mandatory retirement age of 65 for Chairman and CEO Mike Wirth who is still 62. Wirth will turn 65 in late 2025. The board apparently concluded that there are no internal candidates ready to take over, even within two-plus years, and that Wirth is the right leader and proceeding with the right strategy in place to continue the business on the trajectory with which it is currently engaged.
Wirth has already been in this role for five years, has served with the firm for 40 years, and had led the refining and chemicals business prior to taking on his current position. This is some endorsement, and leaves no uncertainty in regards to how the board feels about their leader. CVX was the pre-opening leader among the 11 energy names on my current watch list for the sector.
My Thoughts
Chevron has let us know that there will be an earnings beat reported this Friday, but those adjusted earnings will likely wind up as a 50.3% haircut relative to the year ago comp. According to FactSet, Energy sector earnings are set to take a 51.3% smack-down year over year, so CVX is looking at performance in line to slightly better than the industry is looking at broadly.
The firm also told us that for the second quarter, CVX returned a record $7.2B to shareholders, comprising $.4.4B worth of share repurchases and $2.8B in dividend payouts. For the trailing twelve months, which obviously does not include this coming Friday's release, Chevron generated operating cash flow of $48.752B, and spent $13.052B on CapEx. This left free cash flow of $35.7B, so the firm remains a cash flow beast.
Out of that flow, Chevron over twelve months repurchased $12.41B worth of common stock, while dishing out $11.079B in cash dividends. All while repaying $6.78B in debt and still adding more than $4B to the firm's cash position. Obviously, under Mike Wirth, Chevron has been masterful at getting shareholders paid while responsibly managing the balance sheet. I am not in Chevron right now, but I can dig this.
As a matter of fact, with corporate earnings about to trough, with Energy in the lead, with Europe about to tip-toe into recession, and with China seemingly unlikely to go the large stimulus route at least for now, these shares could be close to where someone like myself starts to think about re-initiation. That 3.81% yield, without surrendering prospects for growth in a better environment is no joke.
The stock is in as obvious a descending triangle as we traders can come across. This is a bearish pattern with a pivot (or baseline) of $150. The stock can still find support at its 21 day EMA (exponential moving average) and 50 day SMA (simple moving average), both of whom are currently running at $155. Lose $155, and Chevron may very well lose $150. The stock is trading with a $160 handle this morning. Where it goes then is speculative. The stock found support at both the $140 and $130 levels last summer.
A (Not The) Plan (minimal lots)
I am thinking that I want to capture that dividend, which will require an equity stake, but I will need the flexibility to scale the stock in, reducing average point of entry because CVX could show weakness ahead of making another run at the highs of early 2023.
- Purchase 100 shares close to $160.
- Sell August 18th $165 calls for about $1.75
- Sell August 18th $155 puts for about $1.95
- Sell August 18th $150 puts for about $0.95.
Net Basis: $155.35
Note: Trader takes on an equity stake, and sells covered calls expiring on August 18th in order to reduce net basis by $1.75. Because this trader is interested in adding to his or her equity stake, the trader is fine with selling discounted risk over time. Hence, the sales of these two series of puts. Either this knocks down the net basis for the original purchase, or pays the trader to wait for the opportunity to scale in his position.
