Chemron Corp’s Financial Outlook and Investment Strategies

Recent Financial Performance

Chevron Corp (CVX) has recently reported a 15% increase in free cash flow (FCF) quarter-over-quarter. This positive change follows the company’s acquisition of Hess, which has bolstered its FCF outlook. Analysts believe that if Chevron raises its dividend by 4%, CVX could be at least 10% undervalued. On August 1, CVX closed at $151.40 after announcing its Q2 results, marking a significant decline from its peak of $168.51 on April 1.

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In a previous article, we explored how shorting out-of-the-money (OTM) put options can be an effective income strategy. Now, let’s take a closer look at Chevron’s latest financial results and an updated price target.

Chevron’s Q2 Results

Chevron reported an adjusted free cash flow of $4.9 billion in Q2, reflecting a more than 16% increase compared to the previous quarter’s adjusted FCF of $4.2 billion. This growth occurred despite a 10% decline in crude oil prices.

The adjusted FCF calculation accounts for net changes in working capital and certain acquisition costs, showcasing Chevron’s ability to enhance cash flow from its operations. Following the completion of the Hess acquisition on July 18, management has indicated a significantly more positive FCF outlook.

Importantly, Chevron is now able to cover its substantial dividend and share buyback costs. In Q2, the adjusted FCF of $4.9 billion fell short of the $5.5 billion required for shareholder payments, which included $2.9 billion in dividends and $2.6 billion in share repurchases. However, projections indicate that with improved revenue and FCF margins, these costs could be adequately met.

For example, if the Q2 adjusted FCF margin of 10.3% increases to 11.65%, it could potentially cover annual shareholder returns:

• Projected revenue for 2026: $194.5 billion
• Estimated adjusted FCF: 11.65% of $194.5 billion = $22.65 billion
• Annual shareholder payments: $5.5 billion x 4 = $22 billion

Even if the margin remains at 10.3%, the adjusted FCF would still be around $20 billion, which is less than 10% below the shareholder payment requirement.

Dividend Expectations and Price Target

Investors can look forward to a high dividend yield of 4.52% based on the current price, which could contribute to an increase in CVX stock value. Chevron has already announced or paid three of its four quarterly payments at a $1.71 dividend per share rate. Assuming a 4.1% increase, the quarterly dividend might rise to $1.78, leading to a $7.11 annual run rate.

Historical yield metrics indicate an average yield of 4.25%. Based on this, the target price can be calculated as follows:

• Next 12 months (NTM) DPS: $7.05
• Price target: $7.05 / 0.0425 = $165.88, representing a +9.6% potential upside.

Using the expected $7.11 DPS next year, the price target increases to $167.29, indicating a 10.5% upside from the current trading price. Analysts generally agree that a target price of at least 10% higher, averaging around $166.54, is reasonable.

Various analyst surveys report slightly varying target prices, with averages ranging from $164.35 to $184.25 per share, suggesting an overall potential upside of +12.7% based on these metrics.

Market Considerations and Options Strategy

While the outlook is optimistic, it is important to note that there are no guarantees over the next 12 months. The market must observe whether Chevron’s free cash flow continues to improve. One viable strategy for investors is to consider establishing a lower buy-in price while generating income through options trading.

In a recent article, a suggestion was made to sell short a put option with a $144.00 strike price expiring on August 8, which was slightly below the trading price. The premium received at that time was $2.41 per contract, yielding 1.67%. As of the last report, that premium had decreased to 21 cents, resulting in a successful short-play with 91% of the yield realized.

For the September 5 expiry period, a new opportunity arises with the $167.00 put option, which is 2.91% out-of-the-money, offering a midpoint premium of $2.65. This provides an immediate yield of 1.80% over the next month.

This strategy results in a lower potential buy-in breakeven price of $144.35, or 4.6% below the recent closing price. For current investors, this approach also generates additional income. Over two trading periods, total income could amount to $485, based on an average investment of $14,550, leading to a 3.33% yield for seven weeks, translating to an annualized expected return of over 23.3%.

Final Thoughts

The current financial landscape for Chevron presents both opportunities and challenges for investors. By employing smart investment strategies, including options trading, both new and existing investors can potentially benefit from the company’s positive outlook.