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Chevron Drops After Surprise Loss, Dividend Disappointment

(Bloomberg) — Chevron Corp. slumped after posting a surprise loss and failing to increase its dividend, signaling that the aftermath of 2020’s pandemic-driven petroleum demand crash will linger for the world’s biggest oil companies for some time to come.

The California oil titan lost a penny per share during the fourth quarter, compared with the Bloomberg Consensus for a 7-cent profit due to a weak performance from its refineries, where runs were reduced substantially in response to lower demand for jet fuel, diesel and gasoline. Analysts expressed disappointment that the company failed to raise its first-quarter dividend despite having lower debt than peers.

“The absolute metrics do not make for great reading,” Alastair Syme, a London-based analyst at Citigroup Inc., wrote in a note. “The simple message is that Chevron (and integrated oil company peers) is not well suited to a sub-$50 oil price world.”

A substantial rally in oil and gas prices since Covid-19 vaccines were first approved in early November isn’t enough to lift the doom and gloom surrounding Big Oil stocks. While executives will use the extra cash to pay down debt and begin to rebuild their reputations with investors, steep hurdles remain. Chevron won’t resume its production growth plan for the Permian before the pandemic is in the rearview mirror, sees continued pressure in its refining division and is taking a cautious approach to shareholder payouts, executives said.

READ: Chevron Says Permian Growth Restart Depends on Pandemic, OPEC+

The stock dropped as much as 4.6% Friday, underperforming the S&P 500 Energy Index which traded 3.2% lower at 2:05 p.m. in New York.

While Brent crude traded up 0.7% to $55.92 a barrel, near the highest since February, there’s “downside risk” to prices, Chevron CEO Mike Wirth said on a conference call with analysts.

“We are still in the middle of a pandemic, demand is still off and in total the global economy is functioning below its capacity,” he said. “Oil prices today are supported in part by a unilateral move by Saudi Arabia to take a million barrels a day off the market.”

Chevron maintained its dividend at $1.29 a share this week, in contrast to a hike in the first quarter of last year. “Some people were maybe a little surprised you didn’t increase your dividend the other day,” JPMorgan Chase & Co. analyst Phil Gresh said on the call.

Wirth said cuts to capital spending and costs last year means that Chevron now generates free cash flow in excess of its dividend at oil prices below $50 a barrel and that growing the payout in the future is the company’s top priority.

Evidence of why a cautious approach is needed came in Chevron’s fourth-quarter results. Even after aggressively cutting capital spending by a third, it was still almost $3 billion more than incoming cash flow. That meant borrowing more to protect dividends, contributing to a 64% increase in debt to $44.3 billion in 2020. To be sure, half of the rise in borrowing came from the recent acquisition of Noble Energy.

Low crude prices and $338 million in losses from Chevron’s global network of refineries wiped out most of the gains from harvesting oil and gas during the quarter. Crude input at its U.S. refineries dropped by 17% in response to fewer orders for jet fuel, diesel and gasoline.

“We’ll see a recovery in the upstream that’s going to happen a little bit before the downstream,” Chief Financial Officer Pierre Breber said during a Bloomberg TV interview. Though uncertainty remains, the second half of this year “looks more like normal.”

Added costs amounted to the recent acquisition of Noble Energy totaling $120 million, higher pension charges and downtime at Australian liquefied natural gas operations also weighed on earnings.

When asked about Chevron’s approach to the energy transition, Wirth stuck to the script, insisting that the company would not invest heavily in anything where it doesn’t hold a competitive advantage, like wind and solar, drawing a contrast with European rivals. Chevron’s strategy is to lower emissions from its own operations including power sources and invest in carbon capture and small-scale technology ventures that have a competitive edge. He sounded caution on soaring valuations of clean-energy start-ups.

“Things that are supported by low interest rates, lots of investor enthusiasm and government policy may work in the short term,” Wirth said. “When the day comes that interest rates are up, maybe investor perceptions shift a little bit and maybe government policy shifts a little bit, have we invested in things that can sustain in that environment?”

(Updates with CEO comment in sixth paragraph.)

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