Chevron's earnings have been boosted by soaring energy prices in FY 2022, but as prices consolidate, the company's earnings prospects have deteriorated. CVX is now already deep into an earnings contraction and their Q2'23 free cash flow did not cover shareholder returns. With falling EPS estimates and valuation risks, investors should be cautious.
Chevron profited in FY 2022 from rising prices for petrol and oil due to favourable market developments. Chevron was able to achieve record profits last year as a result of rising oil prices, but as those prices have begun to stabilise, the energy company's profitability prospects have gotten worse. Given the downward trend in the price of oil and natural gas and the sharp drops in earnings and free cash flow reported by Chevron in Q2'23, I think the company could experience significant losses in a world with lower prices.
Chevron set forward a bold strategy to increase its free cash flow (estimated 10% FCF growth yearly, Source), but in my opinion, this objective will only be feasible if energy prices continue high. Long-term energy costs have never sustained 10-year highs and have instead consistently stabilised. Because of this, I think investors should prepare for more pressure on Chevron's earnings projections, which have already started to decline significantly. In the past 90 days, analysts have reduced their EPS forecasts for Chevron's fiscal year 2023 twenty times, compared to three upward EPS revisions.
The largest threat to Chevron is the continuation of the production segment price realisations fall, which had a negative impact on the company's financial results in the second quarter. A severe recession could make this issue worse. Additionally, if Chevron does not comply with Australian unions' pay demands, the company's liquefied natural gas facilities could be shut down, which could put additional pressure on revenues in the near future.
However, it's possible that a recession won't actually happen, which would be good for Chevron and oil prices. Reuters reports that the likelihood of a recession has just decreased. Energy prices may rise if a recession is avoided, which would reverse Chevron's profitability and free cash flow trend.
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