One of the favorite investments of those individuals interested in dividend growth is oil and gas giant Chevron (CVX). Indeed, it seems as though a bullish article on the company gets published on this site almost on a daily basis. However, the company has a number of challenges which it must overcome in the next few years that many of these analysts overlook.
One of the problems that the company needs to address is its declining production. This is a problem that Chevron shares with many of its large Western peers. This chart shows how the company’s average production rate has varied over the 2009-2013 period for Chevron and several other large oil companies:
Source: Platts
As this chart shows, Chevron’s average daily production declined by 6.2% over the 2009 to 2013 period. This is a problem because there are only two ways for an oil and gas company to increase its revenue: increasing its production or selling its oil for higher amounts of money. As oil prices have fallen considerably over the past year, Chevron is not going to be able to grow its revenues by collecting higher prices for the oil and gas that it sells. Even were it the case that oil prices had remained high, this would still not be a reliable way for Chevron to grow its revenues as the prices for both oil and gas are completely outside of the company’s control. Thus, by far the most reliable way for an oil and gas company to grow its revenue is to grow its production and this is clearly something that Chevron has failed to do.
This shows in the company’s revenues, which have consistently declined over the past few years. Here are Chevron’s annual revenues over the 2011-2013 period, over which time oil prices were somewhat stable:
Source: Yahoo! Finance
It is likely that Chevron’s revenue will continue to decline over the full year 2014 due to the sharp decline in oil prices that occurred during the latter half of the year.
These declining revenues have put pressure on other areas of the company’s finances, which brings us to another problem that Chevron must address – its cash flow. One metric that dividend investors evaluating a company should be familiar with is free cash flow. Investopedia defines free cash flow as,
