Key Points
Late Friday, Chevron gave investors some good new on this year's free cash flow.
FCF could grow as much as 75% year over year as production goes up, and capex goes down.
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War. Huh? What is it good for? Well, apparently it's good for oil prices and oil stocks -- Chevron (NYSE: CVX) in particular.
Global demand for oil amid Mideast turmoil spurred Chevron to raise its production forecast to between 4 million and 4.1 million barrels per day for this year, as TheFly.com reported late Friday. At the same time, Chevron advised that its capital spending will be closer to $18 billion than $19 billion.
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Investors liked the news, and Chevron stock is up 3.2% through 10:15 a.m. ET this morning.
Image source: Getty Images.
More oil, less spending, more profit!
More oil production at higher prices, and less capital spending? That's a recipe for higher profits and a near-term gusher of cash. Accordingly, Chevron told investors it anticipates growing its free cash flow by about $12.5 billion this year.
Added to the $16.6 billion the company generated last year, this implies 2026 FCF could surpass $29 billion, growing 75% year over year!
How to value Chevron stock
With $16.5 billion in FCF already produced this year, a $29.1 billion by year-end looks entirely achievable. Indeed, at its current pace, Chevron could potentially bury its own forecast and generate as much as $33 billion this year.
But let's work off the company's own, more conservative forecast.
Chevron has a $366 billion market capitalization. Dividing $29.1 billion into that gives us a 12.6x price-to-free cash flow ratio for Chevron stock. Factoring in a 3.8% dividend yield, I'd say any long-term growth rate of 9% or better would be good enough to make this stock a buy -- and analysts are forecasting more than a 16% long-term growth rate.
That's good enough for me. Chevron stock looks cheap enough to buy.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. 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.
