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Chevron, Exxon priorities ‘remain the same’ regardless of oil prices: Analyst

Truist Securities Managing Director Energy Neal Dingmann joins Yahoo Finance Live to discuss Chevron’s $75 billion buyback plan, energy earnings, the energy sector's outperformance, a petroleum-less future, and the outlook for Chevron and Exxon Mobil.

Video transcript

[AUDIO LOGO]

- All right, Chevron's $75 billion buyback plan as shareholder returns in the spotlight for energy companies as earnings roll in, but with Chevron posting disappointing fourth quarter results, what could this mean for other energy names? Here to discuss is Neal Dingmann, Truist Securities Managing Director for Energy Research. Neal, good to see you here. What should investors take their cue from on Chevron, these less than amazing earnings results or do they go all in off that buyback?

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NEAL DINGMANN: Thanks for having me. I think it's both of what you said. I think, number one, I think my companies are set up I call them good this year, they're not going to be great. Shareholder return, I mean, even for Exxon is going to be-- or for Chevron, free cash flow's going by $30 billion. That's versus about 37 last year. So look, it's still stellar free cash flow. Is it going to be the record we saw last year?

Absolutely not, but as you pointed out, they significantly increased their buyback to now where they're paying back almost 50% of their free cash flow. You know, this still trails-- you look at some of the large independents like a DOG that pays back 60%, a Diamondback that pays back 75%-- so you know, what Chevron and even Exxon will likely do is, when it comes to shareholder return, putting themselves more in line from a payback standpoint.

- After 2022 and the performance that they did see, how are large energy companies really laying out their financial priorities and how might the stock react off of that as well?

NEAL DINGMANN: Yes, number one, it's interesting, prices can go up $10 or $20, prices could go down these days to $10 or $20 and the priorities remain the same. It's, number one, protect that balance sheet, and of course, it's stellar for Chevron and Exxon. Number two, continue to have at least stable growth. They have that. And then number three, look at the shareholder return, and that's where these companies now are able to step up and we're seeing that.

So to me, I think why this group still is going to be one of the better sectors out there is when you look-- I mean, even now you look at Chevron, they pay over almost a 4% yield and they're going to be, as I said, that you mentioned, having a buyback that's three times higher than what it was last year. So as such, you're going to be receiving back as an investor almost 50% of your free cash flow, which to me, is still superior versus any other sector.

JULIE HYMAN: Hey Neal, it's Julie here. Chevron was a surprise, right? Certainly you-- I don't know if anybody on the Street was expecting the size of this buyback. Does that mean we're going to get surprises from some of the other majors and also some of the smaller oil companies that you talked about in terms of magnitude? Does this up the ante?

NEAL DINGMANN: No. Well, you're right, Julie. I mean, it certainly was a surprise. To bump it up to $75 million and not even put a timetable on how long they have to do that, I mean, that's-- and obviously, the White House has been even pushing back on that. They'd rather have growth than the payback. For the majors to do that, or the very large independents to push it up to 50%, 60% of paying out free cash flow, that's certainly a surprise.

What has happened is that a year or so ago you've had the likes of Devon, Pioneer, Diamondback, you name it, that now have announced that they're going to pay back 75% of their free cash flow. So the precedent has been set with the large independents and the majors have just been kind of holding out and now they're starting to play a little bit of catch up when it comes to in terms of shareholder return.

JULIE HYMAN: How much of an overhang or a limiting factor is Washington at this point, Neal? Already, obviously, it's been sort of a tense back and forth during the pandemic between producing more, oh, but we want to transition to a petroleum-less future, et cetera. How are you thinking about that as we head into 2023?

NEAL DINGMANN: I mean, I think still that comes into play, Julie, but I think number one, these companies, like any of my good energy companies, basically respond to what their shareholders ask them to do. And right now, first and foremost, shareholders want a payback. Their comment has been, we've held these energy companies now for some cases three years, five years, 10 years, and we've gotten very little payback, so it's very well known out there now that these investors, either through dividends and/or buybacks, want some payback.

So again, any of these companies have to pay attention to the White House. Is the White House going to put some sort of tax on buybacks, on any sort of shareholder return? That's wait to be seen. But again, these companies still answer to the shareholders and I think that's what's clear by the large increase in the buyback announced by Chevron.

- Neal, do you think Chevron will execute fully on this buyback?

NEAL DINGMANN: I do. The timing can be a little bit-- again, that's why I don't think they put a timetable. Remember, on their last one, which was $25 million, it expires at the end of this quarter so they had a very definitive term before on what they could do. But again, what they've kind of announced is look, we're going to pay you back about 50% of our free cash flow. So, you know, again, remember, this is a company that doesn't hedge.

You tell me, basically, what you think prices are going to do. I have a pretty good idea of what they're going to generate in free cash flow, and you have a pretty good idea of what they're going to pay back. So all those sort of blocks sort of start to stack up once you know what commodity prices are going to be or what you think they're going to be for the year.

JULIE HYMAN: Neal, good to catch up with you. Neal Dingmann, Truist Securities Managing Director of Energy. Thanks again.

NEAL DINGMANN: Thanks, Julie.