Chevron's Profits Fall Short. Is This Top Warren Buffett Stock in Trouble?

Chevron (NYSE: CVX) finished 2022 with a bit of a whimper. While the oil giant's profits rose compared to the prior year period, they were significantly below its third-quarter record. Meanwhile, they fell short of analyst expectations.

The oil company, which is one of the top holdings of Warren Buffett's Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), faced headwinds from lower oil and gas prices and a write-down in its international operations. Here's a look at whether these issues suggest that more troubles are ahead for the oil giant.

Drilling down into Chevron's quarter

Chevron posted $6.35 billion, or $3.33 per share, of net income in the third quarter. That's up more than 25% from the year-ago period's $5.05 billion, or $2.63 per share profit. However, it dropped significantly from its $11.2 billion profit in the third quarter (which marked the second-highest tally ever, only slightly below its second-quarter record). Further, Chevron's fourth-quarter profits missed the analysts' consensus estimate by $0.20 per share after adjustments.

Lower oil and gas prices put pressure on its profits in the quarter. Chevron's production also fell 3% compared to the year-ago period to 3.01 million barrels of oil equivalent per day. While its U.S. output rose 4% because of strong results in the Permian Basin, international production declined by 7%, mainly because of the end of concessions to produce oil and gas in Thailand and Indonesia.

Chevron also recorded $1.1 billion of write-off and impairment charges related to its international upstream business, which took a bite out of its profits. The company recorded a large reserve reduction in Kazakhstan resulting from the impact of higher prices on those reserves.

For the full year, Chevron produced a record $36.5 billion profit, which exceeded its previous peak set in 2011 by $10 billion. The company also posted record annual cash flow from operations ($49.6 billion) and record free cash flow $37.6 billion).

A bump in the road or cause for concern?

Surging oil prices led Buffett's Berkshire Hathaway to significantly boost its Chevron stake early last year. Berkshire bought about $20 billion of Chevron shares during the first few months of the year to position its portfolio to capitalize on higher oil prices. Buffett's company now owns over $31 billion of Chevron stock, which is 8.8% of that company's outstanding shares. The position also represents Berkshire's third largest holding at 9% of its portfolio. Buffett and Berkshire, in short, have a lot riding on Chevron.

Macroeconomic concerns in the year's second half put pressure on crude prices, which impacted Chevron's earnings. Those concerns could continue to keep the downward pressure on oil prices in the near term. However, many believe several upside catalysts will push crude prices higher this year. Supplies remain tight because OPEC continues to limit its output. In addition, the U.S. isn't planning to release any more oil from its Strategic Petroleum Reserve, and there's a lot of uncertainty about Russia's supply. Meanwhile, reopening Asian economies from pandemic-related shutdowns could prove to be a big demand catalyst. These factors drive Chevron's CEO Michael Wirth's belief that "risks remain skewed toward the upside" for oil prices.

Chevron is in a great position to capitalize on higher prices. The company has been investing heavily in its highest-margin assets in recent years, including the U.S. Permian Basin. These investments should continue to pay big dividends for the company by growing its output this year:

A slide showing Chevron's production growth.

Image source: Chevron Investor Relations Presentation

Chevron expects its output to grow by about 3% this year. That puts it in a strong position to capitalize on higher prices.

Meanwhile, the company continues to invest heavily to expand its traditional and new energy businesses to drive profit growth in the future. It's investing billions in building out its production capacity in places like the U.S. Gulf of Mexico, Israel, Kazakhstan, and Egypt. It's also expanding its chemicals and refining operations in the U.S. Chevron is also investing in lower carbon opportunities like renewable fuels and carbon capture and storage.

Even with these investments, the company is generating more cash than it needs, so it's returning a gusher of cash to shareholders. Chevron recently increased its dividend by another 6% and boosted its buyback program to $75 billion. The company can afford those higher cash returns because it has a fortress-like balance sheet. It ended last year with a 3.3% leverage ratio, substantially below its 20% to 25% target range.

Stronger than ever

Even though Chevron's fourth-quarter profits came in a little lighter than expected, the company delivered record results last year. Meanwhile, it's in an excellent position for the future. It has a strong traditional energy business and growing low-carbon operations to go with a top-tier balance sheet. That should give it the fuel to expand its profits and cash returns in the coming years. Those are the features Buffett loves to see in a stock his company owns.

10 stocks we like better than Chevron
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Chevron wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of January 9, 2023

Matthew DiLallo has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.