HSBC Holdings PLC has recently issued a research report downgrading Chevron (CVX.US) from "Buy" to "Hold," while simultaneously raising its price target from $169 to $180, implying approximately 2% upside potential. This adjustment reflects HSBC's cautious balancing of the tension between Chevron's fundamental strengths and its current valuation—while acknowledging its cash flow growth and financial discipline, the bank believes the stock price already fully reflects the positive factors. From the perspective of its Q4 2024 earnings, Chevron delivered results that surpassed market expectations. Adjusted earnings per share exceeded market consensus by 6%, while after-tax net operating profit from its upstream business reached $3.2 billion, beating expectations by 7%. Total production of 4.05 million barrels per day also surpassed consensus estimates by 2%. This performance was driven by strong operational results from TCO, the Permian Basin, and the Gulf of Mexico, with quarterly buybacks of $3 billion hitting the top end of the $2.5-$3 billion guidance range. However, after-tax net operating profit from the downstream business was $800 million, falling 6% short of market expectations, as weakness in U.S. operations was offset by growth in international business. Regarding structural cost reductions, Chevron achieved $1.5 billion in cost savings in 2024 and is confident in reaching its cumulative target of $30-$40 billion by the end of 2026, with over 60% stemming from sustainable efficiency improvements rather than one-time disposals. Capital expenditure guidance remains steady at $18-$19 billion, positioned at the lower end of the $18-$21 billion range projected for 2026-2030. The TCO project is expected to contribute $6 billion in free cash flow at a Brent crude price of $70 per barrel. Production growth remains a central narrative for Chevron. Upstream production is forecast to grow 7-10% by 2026, although Q1 will see a temporary decline of 185,000-255,000 barrels per day due to maintenance in Kazakhstan and winter weather impacts in the U.S. More notably, CEO Mike Wirth reiterated that, subject to receiving additional authorization from the U.S. government, production in Venezuela could increase by 50% over the next 18-24 months, rising from the current ~200,000 barrels per day to approximately 300,000 barrels per day. However, HSBC points out that even if this target is met, the impact on overall valuation would be limited, given that Venezuelan operations contribute only 1-2% to group cash flow, with an incremental increase of about 120,000 barrels per day. A shift in valuation logic is key to the rating downgrade. Year-to-date, Chevron's stock has risen 16%, second only to ExxonMobil among integrated oil majors and outperforming peers by 5 percentage points. This rally has been primarily driven by Venezuela-related expectations and the rebound in oil prices, but HSBC believes the current valuation has already priced in the positives—Chevron's 2026 EV/Discounted Cash Flow ratio discount to ExxonMobil has narrowed to just 2%, which is considered a reasonable level. In terms of shareholder returns, the quarterly dividend was increased by 4% from $1.71 to $1.78 per share, representing an annualized payout of approximately $14 billion. However, the projected 2026 distribution yield of 7.2% lags behind BP and TotalEnergies' ~8.5% and Shell's over 10%, widening the gap with European peers once more. On the technical front, Chevron is accelerating the application of chemical flooding technology in the Permian Basin, planning to increase the adoption rate in new wells from 40% in H1 2025 to nearly 85% by late 2025 and 100% by 2027, with the goal of doubling shale oil recovery rates. The Gulf of Mexico Ballymore and Whale projects are set to commence production in 2025, and combined with the ramp-up of the Anchor project, they are expected to help achieve the 2026 target of increasing production by 300,000 barrels per day. HSBC has revised its net profit forecasts for 2026 and 2027 downwards by 20% and 10%, respectively, primarily reflecting higher depreciation and amortization expenses, an upward revision to the company's cost guidance, a moderation in refining margins, and a slight adjustment to its WTI crude price assumption from $62 to $61 per barrel. It is worth noting that while increased depreciation erodes profits, it does not impact cash flow; consequently, cash flow forecasts were adjusted only modestly, with 2026 lowered by 4% and 2027 raised by 1%. The balance sheet remains healthy. The quarter-end net debt ratio was 15.6%, a slight increase from 15.1% at the end of Q3 but still well below the target range of 20-25%, providing ample room for dividend growth and potential debt financing. TCO loan repayments are scheduled for $1 billion in both Q1 and Q3 of 2026, totaling $2 billion for the full year. In summary, HSBC concludes that Chevron has transitioned from a "valuation bargain" to being "fairly valued." While maintaining a positive long-term view on its project execution and capital discipline, the bank sees limited short-term upside, suggesting investors need to re-evaluate the trade-off between growth quality and price. For investors seeking higher shareholder returns or greater valuation flexibility, European peers may present more attractive alternatives.
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