The company is working toward a zero-emission future, having invested more than $1 billion to date in reducing carbon emissions and meeting its 2023 upstream carbon intensity reduction target three years ahead of schedule in 2020. Chevron announced plans to invest more capital in low-carbon energy businesses on Sept. 14, accelerating its low-carbon ambitions.
However, JPMorgan Chase & Co. (JPM, Financial) analysts downgraded Chevron stock to neutral from overweight following this announcement, and assigned a price target of $111, down from its prior target of $128, citing the company's dividend coverage breakeven is now coming closer to a Brent oil price of $55 per barrel due to rising transition costs that are not offset elsewhere in the portfolio. In other words, they seem to think Chevron's financial structure is too weak to transition to clean energy while keeping its market position.
Chevron’s 2030 green energy goal
The company set a goal on Sept. 14 to increase renewable natural gas production to 40,000 MMBtu per day to supply a network of stations serving heavy-duty transport customers, increase renewable fuels production capacity to 100,000 barrels per day to meet growing customer demand for renewable diesel and sustainable aviation fuel, and increase hydrogen production to 150,000 tons per year to supply industrial, governmental and commercial customers.
Chevron also wants to raise carbon capture and offsets to 25 million tons per year by collaborating with others to build regional centers. Chevron stated that it would spend more than $10 billion by 2028 to reduce its carbon footprint, which is more than triple the company's earlier forecast of $3 billion.
Chevron intends to create a $25 billion additional cash buffer over the next five years, and the company also reiterated its greenhouse gas intensity targets for upstream production in 2028, which are expected to be reduced by 35% from 2016 levels.
Why are oil companies investing in clean energy?
Oil and gas companies across the world are investing in renewable energy to lower their carbon footprint and diversify their offerings in response to global efforts to reduce carbon emissions. This move is also essential if these companies want to survive in the long-term, since oil is a non-renewable resource.
Companies in Europe are setting the pace by diversifying their portfolios to include renewable resources. According to BloombergNEF, which has been tracking clean energy investment by 34 of the world's top oil and gas producers and refiners, investment in specialized enterprises and low-carbon assets fell by 12% year-over-year to $12.7 billion in 2020. Oil and gas businesses have so far invested about $60 billion in renewables, storage, advanced transportation, digital technologies, hydrogen and carbon capture over the last five years, with wind, solar and battery storage accounting for the majority.
Further, a report by Bloomberg highlights that global investment in renewable energy capacity (excluding large hydro) was $303.5 billion in 2020, up 2% from 2019. According to the WorldOil study, over 60% of senior oil and gas executives say their companies are actively shifting to a less carbon-intensive energy mix in 2021 and are planning to continue this trend in the coming years.
From almost entirely avoiding the issue of climate change, management teams of Exxon Mobil Corporation (XOM, Financial), Chevron and other major oil companies are now spending significant time and effort to reposition themselves to benefit from the accelerating green energy market and have committed to net-zero emissions targets because their very existence depends on it.
Governments and investors are becoming increasingly concerned about climate change and are demanding that businesses take conscious actions to reduce their reliance on fossil fuels, which account for 80% of global energy production today.
As the transition from fossil fuel to renewable energy gains traction because of climate change concerns, the oil and gas industry has taken a keen interest in this green industry, and Chevron is following the footsteps of European oil giants by focusing more on this sector.
Although cash flows might be negatively impacted by these investments in the short run, Chevron seems to be doing the right thing to secure the sustainability of its long-run earnings. The change in the company’s strategy, therefore, should alleviate the concerns of long-term investors who were worried that the company might have to cut its dividend in the future to preserve cash.