Chevron is cashing in on its Canadian assets.
Chevron (CVX 0.25%) has one of the strongest financial foundations in the oil patch. The energy giant ended the second quarter with a 10.7% net-debt ratio, which was comfortably below its 20% to 25% target range. That strong balance sheet enables it to continue investing in its business and returning cash to shareholders amid the continued fluctuations of oil and gas prices.
The oil company’s fortress-like balance sheet is about to get even stronger. Chevron has agreed to sell its Canadian assets to Canadian Natural Resources (CNQ 2.87%) in a $6.5 billion deal. That sale will bolster its financial flexibility while enabling the company to focus on investing in its best assets.
Cashing in on Canada
Chevron has agreed to sell its 20% non-operated interest in the Athabasca Oil Sands Project (AOSP), 70% operated interests in the Duvernay shale, and related assets in Alberta, Canada to Canadian Natural Resources. The $6.5 billion all-cash deal should close by the end of the year. The sales are part of Chevron’s plan to divest $10 billion to $15 billion in assets by 2028 to optimize its portfolio.
The Canadian assets produced 84,000 barrels of oil equivalent per day (BOE/d) for Chevron. That’s a drop in the bucket for a company producing more than 3 million BOE/d. That production is also lower margin and more carbon intensive than the company’s core operating regions. The deal will enable Chevron to strengthen its already elite balance sheet, further enhancing its financial flexibility. It can use that money to continue investing in its higher-return positions during periods of lower oil prices.
Meanwhile, the assets are a perfect fit for Canadian Natural Resources. The acquisition will increase the Canadian oil and gas company’s stake in AOSP to 90%. That project has very stable production, which will contribute to the company’s sustainable cash-flow profile. In addition, it’s picking up assets in the Duvernay, which have meaningful near-term growth while producing free cash flow. The accretive acquisition enabled Canadian Natural Resources to increase its dividend by 7%, extending its growth streak to a quarter century.
Enhancing its ability to weather lower oil prices
Chevron’s fortress balance sheet and low-cost operations put it in a strong position to navigate lower oil prices in the future. The oil company stress-tested its business using a downside scenario where oil prices average $50 a barrel from 2025 to 2027. The company can generate enough cash flow from operations to fund its growing dividend and planned capital-spending program during that period, at that price point. Meanwhile, it would still have the balance-sheet capacity to buy back shares at the low end of its $10 billion to $20 billion annual target range (enough to retire about 3% of its outstanding shares each year). This sale will further enhance its financial flexibility during this time frame.
The oil company is also working to enhance its ability to thrive in the future by making acquisitions. It bought PDC Energy in a $7.6 billion all-stock deal last year. The company added a very low-cost resource position (it increased its oil-equivalent proved reserves by 10% for less than $7 per barrel). Because of those low costs, the acquisition will add $1 billion to Chevron’s annual free cash flow at an average oil price of around $70 per barrel (below the recent level). The deal will also enhance Chevron’s returns in two lower carbon-intensity basins.
Chevron is working on a further enhancement by trying to acquire Hess. The $60 billion deal would add Hess’ position in the Stabroek block in Guyana, which has industry-leading cash margins and lower-carbon intensity. It would also add a position in the Bakken while bolstering the company’s operations in the Gulf of Mexico and Southeast Asia. Chevron sees the deal enhancing and extending its production and free-cash-flow growth outlook into the next decade.
The company’s active portfolio management is all about enhancing its operations. Chevron is selling off lower-margin, higher-carbon-intensity assets like those in Canada to make way for higher-margin and lower-carbon-intensity assets like those it acquired in the PDC Energy deal and hopes to receive in its pending Hess acquisition.
Building a better oil company one deal at a time
Chevron already has a strong balance sheet and resource portfolio. However, that hasn’t stopped it from making deals to enhance both over the past year. Its latest transaction will further fortify its financial foundation while reducing costs and emissions. That will put it in an even stronger position to thrive in the future, making it a great oil stock to own for the long term.
Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.
