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Why Chevron Stock Popped on Monday
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.
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.
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.