Chevron (CVX) missed analyst earnings estimates for the fourth quarter of 2021. The oil giant reported adjusted earnings per share of $2.56, lower than the $3.14 per share analysts were expecting. The miss on earnings came despite the company reporting revenues of $48.13 billion, which was much higher than estimates of $45.337 billion. Operating cash flow of $9.4 billion was also a miss against the $11.3 billion consensus. 

People who just look at the headline numbers may say Chevron isn't making as much money as it should — especially with current elevated oil and gas prices. But we dug through the earnings report and arrived at a much different conclusion. There were a few reasons why earnings were $770 million lower in the fourth quarter of 2021 compared to the third. 

Upstream: A one-time hit

First off, adjusted upstream earnings came in flat QoQ at $5.155 billion despite higher realizations (upstream business is drilling). One negative impact to earnings came from liquid natural gas trading timing effects, which had a positive effect in the third quarter and then an unfavorable swing in the fourth because the price of the commodity has been so volatile. The key thing here is that management expects this negative impact to reverse itself when the inventory is sold. Also, Chevron recorded higher than anticipated DD&A (depreciation, depletion, and amortization) to catch up on the depreciation of an asset that was no longer held for sale. There were also some impairments on certain late-life assets.

What to take away here is that the difference was mostly due to one time non-cash charges to earnings which have little impact on the company's ability to generate profits and cash flow going forward. 

Downstream: Not to worry

In the downstream business, adjusted earnings were down QoQ due to lower chemical margins and volumes. Plus, there was a negative impact from year-end inventory charges. Chevron also dealt with a QoQ increase in expenses like employee benefits, which were a result of the very strong year the company had. 

And as for the cash flow miss, it appears that the difference between the results and what analysts had expected was mostly due to tax charges. Chevron received a dividend from Tengizchevroil (Chevron holds a 50% interest in this company) and the dividend was withheld at a 15% withholding tax due to its treatment as a return of capital. 

Disciplined management

But the real key to the story here is how disciplined Chevron has become with its capital and how great it is for shareholders. For some perspective on this disciplined approach to the business, Chevron's capital spend is about 50% lower than 2019, and operating expenses are about 9% down from 2019. The combination of capital discipline with a higher commodity pricing environment has unleashed record free cash flow generation in 2021. We focus on free cash flow generation because a priority of management is to return those billions of dollars back to shareholders via dividends and buybacks. 

Chevron repurchased $750 million of stock in the fourth quarter, but management said that number expected to step up towards $1.25 billion in the first quarter of 2022. This outlook is higher than the $1.0 billion the market was expecting as part of management's annual guide of $3.0 billion to $5.0 billion this year, and it would not surprise us to see that range move higher in the coming years due to Chevron's capital efficiency. And just yesterday, Chevron announced it increased the quarterly dividend by 6%, and that was more than what the street was expecting. Based on the new dividend payment and today's stock price, Chevron currently pays a dividend yield near 4.5%, more than double the 10-Year Treasury rate, and the dividend is plenty safe with the company's break-evens of oil prices the $30s. And don't forget, Chevron exited 2021 in such a strong balance sheet position with a net debt ratio below 16%. Since the balance sheet does not need to be cleaned up, this means even more cash flow can be returned to shareholders.

A miss in estimated earnings per share can be totally forgotten if the company surprises investors with more than expected return of capital (through dividends and buy backs). We most often talk about earnings per share as an indicator of how well a company is doing and expected to perform, however, it's important to not forget the ultimate reason to own a stock is to expect capital rewards from the company. A company may have high earnings per share, but if they don't use the high earnings to reward shareholders then those earnings numbers ultimately become non-attractive. This leads to free cash flow as another indicator that people look to, because high free cash flow allows company to return capitals to shareholders through the forms of share buybacks or dividends. Since Chevron surprised investors with both forms this quarter, we're willing to overlook the earnings per share miss. 

Outlook

Looking ahead for the full year 2022, management's production outlook (excluding 2022 asset sales) is flat to down 3% due to the expiration of contracts in Indonesia and Thailand. Excluding the contract expirations and asset sales, Chevron expects to increase production by 2% to 5%, led by the Permian, and lower turnaround activity in TCO in Australia. 

Our take

We believe this was a misunderstood quarter from Chevron; not the blowout we hoped for, but we see nothing in the print that would change our thesis in the company. With a dividend yield near 4.5%, an increasing share repurchase program in place, and the potential for oil prices to push even higher and reach $100 per barrel as some think, we think Chevron will work in this volatile market environment.