Chevron’s $80 Billion Pledge to Investors Exceeds $100-Crude Era

(Bloomberg) -- Chevron Corp. plans to hand investors billions of dollars more than it did during the heyday of $100-a-barrel crude as the U.S. supermajor ramps up oil output in the Permian Basin.

In a surprise move, Chief Executive Officer Mike Wirth pledged Tuesday to lavish as much as $80 billion on dividends and share buybacks over the next half decade. The projected returns exceed levels paid out in the years preceding the worst-in-a generation 2014-2016 market collapse.

The key driver of those returns will be crude production from the Permian Basin of West Texas and New Mexico, which will double over the next five years and eventually account for a third of the company's global output.

The targets, unveiled by Chevron at its annual investor meeting in New York, are illustrative of the high-wire balancing act facing Big Oil. The industry's largest companies are being asked to reinvest in future production, reward shareholders, and, at the same time, work through an energy transition that may spell the end of fossil-fuel growth within a decade.

Chevron's projected investor returns “look well supported by the balance sheet,” RBC analyst Biraj Borkhataria said in a note to clients. The presentation “looks more like evolution than revolution, and continues the prior mantra around lower for longer capex, and a steady uptick in Permian performance.”

Chevron said it will save $2 billion by cost cutting and margin improvements while holding annual capital spending to no more than 10% above current levels. Returns on capital will increase to more than 10% by 2024, up a third from current levels.

Returning cash to shareholders is “our number one priority,” Wirth said. “This doesn't rely on higher oil prices. It relies on self-help to greater cost efficiency, continued capital discipline and effective portfolio management.”

Chevron's returns have languished in recent years, far below where they stood a decade earlier. Exxon Mobil Corp. has seen a similar deterioration.

The Permian -- a vast, multi layered swath of oil that dominates North American crude production -- will be a key driver of Chevron's plan to improve performance, offering more than 20% profit for each dollar invested, said Jay Johnson, chief of the company's upstream business. Production will plateau at 1.2 million barrels a day by the mid-2020s with capital spending of about $4.5 billion a year.

The Permian targets show faith in a basin in which many explorers are struggling to generate cash after taking on debts to fund expansions and drilling. Chevron is insulated from those headwinds because it inherited most of its holdings in the region during the 2001 Texaco Inc. takeover.

With a strategy of emphasizing investor returns over production growth, Chevron is following the path laid down in recent years by ConocoPhillips. The strategy is a recognition that the world doesn't need ever-increasing volumes of oil and that shareholders need to be rewarded for owning fossil-fuel producers.

Cash Search

Last year, Chevron returned $13 billion in dividends and buybacks, equivalent to $65 billion on a five-year basis. The new goal of $75 billion to $80 billion is equivalent to almost half Chevron's market value.

“To the general portfolio managers out there, if you're looking for cash, Chevron is the place to be,” Chief Financial Officer Pierre Breber said during the presentation.

Chevron was little changed at $96.51 at 11:54 a.m. in New York after earlier climbing as much as 2%.

--With assistance from Javier Blas.

To contact the reporter on this story: Kevin Crowley in Houston at kcrowley1@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Joe Carroll, Christine Buurma

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