Chevron

Chevron's second-quarter earnings exceeded expectations. In addition to high prices, strong refining margins and higher volumes, the reversal of timing effects benefited both earnings and cash flow, compared with the negative impact in the first quarter. 2026 guidance was largely unchanged.

Why it matters: As an integrated company, Chevron is benefiting from both the higher prices and wider refining margins resulting from ongoing Middle East disruptions. On top of that, it is capturing additional earnings through production growth and early delivery of structural cost-reduction targets. Worldwide production increased to 4,070 mboe/d, a 20% increase from the same period last year, driven by the integration of Hess assets and record performance in the Permian Basin and Gulf of America. US upstream production hit a new record of nearly 2.1 mboe/d. It achieved its target of $3 billion in structural cost reductions, since 2024, six months early. Chevron now expects to finish the year at the lower end of its guidance range of $18 to $19 billion.

The bottom line: Our $192 fair value estimate and narrow-moat Rating remain unchanged. Though it has a smaller refining base than peers to capture strength in refining margins, it will continue to leverage its upstream-dominated portfolio to benefit from an elevated oil price environment. Middle East exposure remains limited. Direct exposure to the ongoing Middle East conflict remains isolated to the Partitioned Zone, representing only about 1% of total second-quarter production. While international downstream results saw a 10% reduction in crude inputs due to regional supply disruptions.

Long view: Chevron is diversifying its earnings with Project Kilby and the Microsoft power agreement, which it expects to deliver midteens returns and long-duration cash flow that are uncorrelated to commodity price cycles. The project, supported by a 20-year PPA, is set to start initial production in 2028.

We are increasing our fair value estimate to $192 from $171 per share after incorporating higher near-term oil prices and refining margins, caused by the war in Iran, into our model. Our model also reflects the latest strategic targets and guidance.

Our fair value estimate implies a forward enterprise value/EBITDA multiple of 6.3 times our 2026 EBITDA forecast of $64.5 billion.

Our fair value estimate is derived using Morningstar's standard three-stage discounted cash flow methodology. This methodology derives a terminal value using our assumptions for long-term earnings growth and return on new invested capital. This valuation methodology also more explicitly incorporates our moat rating, which reflects how long we expect a given firm to deliver excess returns on invested capital from a discounted cash flow analysis.

In our DCF model, we assume Brent prices of $85 per barrel in 2026 and $78 in 2027. Our long-term oil price assumption is $65/bbl. We use weighted average cost of capital of 7.3%.

Chevron's latest plans call for 2%-3% production growth through 2030. Our forecast is at the midpoint of those ranges. We model improved downstream earnings in 2026 and 2027, given recent market conditions. Long-term downstream earnings forecasts rest on the assumption of midcycle refining and chemical margins as well as the benefit of investments and cost reductions.

Chevron’s returns on capital suffered from 2015 to 2020 as a period of high investment was followed by low commodity prices. However, the company was able to reset its cost structure in the wake of the 2015 price collapse. Combined with the addition of high-margin, low-cost volumes, it can now deliver returns at our midcycle price of $65/bbl that are safely above its cost of capital. As such, we rate Chevron a narrow-moat company, as we believe it will deliver excess returns over the next 10 years through an improved cost structure and higher-return production volumes.

Chevron targets a 3% improvement in return on capital employed by 2030 from 2025 levels of a little over 7%, assuming a nominal $70/bbl, lower than the 16% average during 2010-14 but improved from the 3.5% average during 2015-19. We forecast our return on invested capital metric used to evaluate moats to remain above the cost of capital during the next five years and rise to nearly 15% by 2030, compared with our cost of capital assumption of 7.3%, sufficient for Chevron to earn a narrow moat rating given the cost advantage of its assets.

Although Chevron is an integrated energy company, its narrow moat largely rests on the quality of its upstream portfolio. Chevron’s upstream segment holds a low-cost position based on an evaluation of its oil- and gas-producing assets. Its greater exposure to liquids and liquids-linked natural gas production, which accounts for over 70% of total volumes, has historically delivered peer-leading cash margins and returns of nearly 20%. From 2015 to 2020, however, returns suffered partly due to falling oil prices and partly due to overinvestment at the last cycle's peak.

The best examples are Chevron’s LNG projects Gorgon and Wheatstone in Western Australia. The two projects added about 400 thousand boe/d of production capacity with high margins thanks to contractually set, liquids-based pricing. The projects were already low-return and capital-intensive, given the costs associated with timing, location, and complexity, but their returns were depressed further by significant cost overruns. As a result, full-cycle returns are likely to be only marginally above the cost of capital, weighing on overall segment and firm returns even as they contribute to higher per-barrel margins.

However, overall segment returns should improve, thanks to the addition of higher-return projects. Newer projects have superior economics and can earn higher returns at lower oil prices after rounds of cost reductions, reengineering (standardization and simplification), and service price deflation.

Recent growth has come from the Permian and the expansion of the Tengiz project in Kazakhstan, both of which added high-margin oil volumes at low breakeven prices. Past exploration success in the Gulf of Mexico endows the company with a large set of economic brownfield development opportunities at less than $45/bbl. Combined with new projects, volumes in the Gulf should grow through 2027. Chevron also has opportunities for incremental capacity increases at its Australian LNG projects, which should be high-return, and a new, large resource basin in the Mediterranean natural gas reserves acquired with Noble for development.

With Hess' Guyana assets, Chevron now has a 30% nonoperating stake in the Exxon-operated Stabroek Block. Its exceptional economics partly reflect the shallow depth of the reservoir and its very high productivity, but the timing of the initial development was a big help. The first discovery, Liza-1, was announced in May 2015, just after the steep crash in oil prices that began in late 2014. As a result, the partnership initially benefited from bottom-of-the-cycle prices from service providers. And due to learning curve effects and economies of scale, future developments are expected to be even more capital-efficient.

The other advantage is the massive scale of the Stabroek Block’s potential resources. Over 30 discoveries have been announced so far. Development is ongoing—the first phase, targeting the Liza discovery, was brought online in late 2019, and the partnership has several phases in service already (with two more already sanctioned and a third pending final approval). With the most recent, there are now seven FPSOs in production or under development. By 2030, eight FPSOs are expected to be online, with a combined gross capacity of over 1.7 million barrels per day. There’s likely further upside with the block potentially eventually supporting as many as 10 phases.

Chevron’s downstream operations consist of its refining and marketing portfolio and its interest in the Chevron Phillips Chemical joint venture. Compared with peers, its downstream segment is relatively small with only 1.8 mmboe/d of refining capacity and few owned retail sites. We typically do not consider refining to be a business capable of earning a moat, except some US refineries that hold a feedstock cost advantage. While Chevron does hold some refineries that qualify on the Gulf Coast and in the midcontinent, the bulk of its capacity does not have such an advantage, given that it is in California. However, in past years, it has improved operational performance, divested lower-quality assets, and increased returns. Meanwhile, the CPChem joint venture is a high-quality chemical manufacturer with low-cost feedstock access in the US and Middle East. While its earnings contribution is small relative to the upstream segment (30% by our forecast in 2030), it generated strong returns on capital of 18% from 2011 to 2019. We forecast that at midcycle levels, returns will approach 18%, supporting Chevron’s narrow moat rating.

Chevron is exposed to several environmental, social, and governance-related risks, but these do not imperil its moat, in our view, as most fall outside the 10-year narrow moat window or are not probable or material enough risk to cause material value destruction. Chevron’s primary ESG risk stems from carbon emissions in its operations and use of its products, emissions, effluents and waste generated in operations such as oil spills, and poor community relations.

The risk from carbon emissions is most likely to materialize through a carbon tax, which increases the price of end products to consumers, reducing demand over time and threatening Chevron’s core business. Carbon taxes may gain greater adoption over time, but the impact on hydrocarbon demand would is likely more than a decade away. It is investing in efforts to improve its emissions intensity, reduce methane leakage, and reduce flaring but lacks the very long-term targets of some of its peers as well as plans to diversify away from hydrocarbons. It aims to reduce its upstream emissions intensity to 24 kg CO2e/boe by 2028, or about 35% from 2016 levels. The company has stated that because necessary advancements in technology and policy have not occurred, it is not on track for 2050 and will no longer use 2050 as a timeline.

Chevron is funding projects in greenhouse gas reduction, carbon capture and offsets, hydrogen, and renewable fuels as part of its new energies business. The amount is less than some peers but is more focused on areas that are tangential to Chevron’s core hydrocarbon business or in the value chains it currently participates. Although these areas are still in the early stages and outcomes are uncertain, they hold greater potential for high returns and competitive advantages than more mature areas such as renewable power, in which many other integrated oil companies are investing. Given their relatively small size and uncertain future, they do not factor into our narrow moat rating.

Oil spills are an ever-present risk for oil companies operating offshore and can be devastating to firm value, as BP’s Macondo incident in the Gulf of Mexico shows. While oil companies regularly cause spills, most are immaterial in size and associated fines and cleanup costs are manageable. Large spills such as Macondo are very rare and do not factor into any of our scenario modeling.

Returns and free cash flow generation should improve, thanks to disciplined capital spending, cost reductions, and the addition of higher-margin production volumes.

Chevron’s large Permian position is mostly composed of legacy acreage, meaning the firm did not overpay to enter the play; 75% has a low royalty rate or none, giving it a cost advantage.

The addition of Guyana improves Chevron's portfolio by increasing its oil leverage, adding additional low-cost high-margin volumes and shoring up its long-term growth outlook.

Chevron's greater oil leverage leaves it more at risk in the event of a decline in oil prices than some more integrated oil peers.

Chevron's acquisition of Guyana will weigh on returns on capital even as it improves earnings and cash flow growth.

Relatively little investment in new businesses outside hydrocarbons leaves Chevron exposed to potential value destruction and stranded resources if oil demand falls faster than expected.