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Chevron’s Debt Increase A Crude Way To
Support Dividend
Ben Black
5/5/2015
Management Speaks Out
In its most recent proxy statement, Chevron (CVX) executives urged caution about lower oil and
gas prices, pleading with investors to be patient as it transitions into a “new normal” of rock-
bottom energy pricing. The company was surprisingly forthcoming in its assessment of the
changing marketplace and the limitations it expects going forward:
“The days of easy oil are over. Costs to find, develop, and produce oil are increasing. At the same time,
demand for oil is flattening and is projected by many to decrease due to a host of carbon-related factors
including regulations to stave off global temperature rise, increasing fuel economy requirements,
decreasing costs of renewables, and fuel substitution. A 21st century business strategy should reflect and
incorporate these factors, emphasizing shareholder value over irrational growth of reserves.”1
In response to requests for a more robust capital return program to augment shareholder
returns when returns on investment from cap ex are muted at best and destructive to
shareholder equity at worst, Chevron reaffirmed its commitment to a growing dividend,
although ironically, it actually kept it unchanged for the 2nd quarter, the first such time that has
happened in several years. Still, it appears that executives know the score and are going to be
focused on supporting the payout, as truly viable opportunities for organic growth and
development of proven reserves dry up, so to speak, as the below quote reflects:
“This changing energy market creates deep investor concern over Chevron’s capital investments in high
cost, high carbon fossil fuel projects. Increased capital distribution serves to maximize and protect
shareholder value; represents a more prudent use of investor capital in the face of growing risks; and
allows shareholders to re-allocate their investments in alignment with a carbon-constrained world.”2
Going over the latest 10Q (quarterly report), it’s easy to understand shareholder concern over
how to best support the stock price. Upstream earnings, a key driver of profitability for most
consolidated oil majors, took a major hit, dropping from about $4.3 to $1.5 billion year over
year, due to rising costs and much lower commodity prices (average crude and natural gas
prices were roughly half of their previous levels in the prior comparable period). On the flipside,
1 Chevron Corporation 2015 Proxy statement, page 1.
2 Ibid.

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upstream earnings were much improved, increasing from about $700 million to $1.4 billion due
to more efficient refining operating activity.
Unfortunately, Chevron’s capital structure and liquidity deteriorated somewhat, as net debt
levels increased by about $6.2 billion. Operating cash flow declined significantly as a result,
going from $8.4 billion to $2.3 billion. That aforementioned leverage, by the way, was used to
cover the dividend entirely, as cash flow from operations was actually used for other purposes.
While that is an unsustainable strategy for the long-term, Chevron’s overall debt-to-equity ratio
remains at relatively healthy 0.217 while its ratio of earnings to fixed charges, a measure which
is very similar to the interest coverage ratio, stands at 9.54. While this is significantly weaker
than what Chevron’s provided in the past, it has more to do with a major hit to earnings than it
does a truly significant increase in debt levels.3
Trying To Find Balance in the Balance Sheet
Net of cash, overall debt remained around $14.5 billion at the end of 2014, which is less than
10% of its total capital. The balance sheet is still in solid shape, and the company’s borrowing
capacity and its ability to service such debt remains strong. Chevron’s costs are slowly coming
back within a reasonably sustainable range, with numerous projects winding down over the
next couple of years. In the latest quarterly report, the company stated a clear goal of covering
both cap ex and dividends entirely out of operating cash flow by 2017.4
Dividend growth has certainly slowed recently, as management maintained the 2nd quarter
dividend at its current level of $1.07 per share. Over the last four quarters, dividends have
totaled $4.28, compared to $4.00 in the prior four quarters, an increase of only 7%, which is a
step back from its 5-year annual dividend growth rate of 9.62%. This makes sense financially
speaking, however, as trailing 5-year revenue growth remains a tepid 3.62%, and unlikely to
materially improve in the next couple of years. With a current dividend yield of 3.98% as of this
writing, and a still healthy balance sheet, Chevron appears to be a safe income stock to own,
particularly given the fact that oil is unlikely to remain artificially cheap forever (depending on
OPEC’s obstinance).5
Foolish Conclusion
Overall, my Foolish take is that despite some disturbing secular trends in the oil and gas
industry over the last 12-18 months and Chevron’s own earnings slump, cost reduction and a
focus on operating efficiency along with prudent cash management will be management’s main
focus to keep the dividend payout ratio in line, ensuring the viability of future dividend hikes. It
is important to note that management fully intends to cover future dividend growth by
operating cash flow in the future, but their delivery on that goal is well worth monitoring. While
3 Chevron 10Q,page 40.
4 Morningstar.combalancesheet section under “financialstab”for Chevron.
5 Fool.com earnings/growth rates tab on Chevron profile.

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the latest quarterly payout ratio of .78 is surprisingly high by Chevron’s own lofty standards, it
was not entirely unexpected given the particularly unfavorable mix of higher costs and lower
revenues over the last quarter.