Chevron cuts back on CapEx, focuses on capital returns

Chevron’s announcement of its 2025 capital expenditure (capex) budget reflects a strategic shift toward prioritizing free cash flow over production growth. The company plans to allocate $14.5 to $15.5 billion to consolidated subsidiaries and an additional $1.7 to $2 billion to affiliates, representing a $2 billion year-over-year decline. This marks the first annual reduction in Chevron’s capex since 2020. CEO Mike Wirth emphasized that the reduced budget aligns with Chevron’s commitment to cost discipline and high-return investments, particularly in lower-carbon initiatives. The decision signals a cautious approach to spending amid subdued oil price expectations and a focus on shareholder returns.

Key areas of focus for Chevron’s spending include the U.S., where approximately $13 billion is earmarked for upstream projects. The Permian Basin will see reduced capex, with a budget of $4.5 to $5 billion, as Chevron shifts from aggressive production growth to enhancing free cash flow. Other U.S. investments include the DJ Basin and Gulf of Mexico, with the latter expected to deliver 300,000 barrels of oil equivalent per day (boepd) by 2026. Internationally, Chevron will allocate around $1 billion to Australian projects, including the Gorgon backfill investments, while downstream capex is projected at $1.2 billion, two-thirds of which will be spent in the U.S.

Chevron’s Tengizchevroil (TCO) project in Kazakhstan remains a major focus. The Future Growth Project (FGP) is on schedule for first oil in the first half of 2025, with a 90-day ramp-up to full capacity. This milestone positions Chevron to reduce affiliate capex significantly after completion. The company is also preparing for contract renegotiations with Kazakhstan, potentially incorporating untapped gas resources into the deal. These developments could unlock new opportunities while maintaining Chevron’s strategic footprint in the region.

In addition to its capex strategy, Chevron plans structural cost reductions of $2 to $3 billion by 2026, supported by technology advancements and operational efficiencies. The company expects a one-time restructuring charge of $0.7 to $0.9 billion in Q4 2024, along with $0.4 to $0.6 billion in non-cash charges. These adjustments reflect Chevron’s ongoing efforts to streamline operations and improve financial performance while navigating evolving energy market dynamics.

The capex reduction also underscores Chevron’s focus on shareholder returns. The company has been buying back stock at a rate of $17.5 billion annually, equivalent to a 6% reduction in its share count if sustained. With a dividend yield of 4.1%, Chevron remains a leader among U.S. energy producers in returning capital to shareholders. However, the slower production growth in key areas like the Permian Basin suggests the company is aligning its spending with long-term cash flow objectives rather than short-term output increases.

The reduction in capex also coincides with Chevron nearing completion of major projects, including those in the Gulf of Mexico and Kazakhstan, which have required significant investment in recent years. As these projects transition into production phases, Chevron is positioned to benefit from their output without the need for comparable levels of spending. This shift could further bolster free cash flow, providing flexibility for future investments or additional shareholder returns.

Chevron’s capex decisions come as the company prepares to integrate its pending acquisition of Hess Corporation. While the current guidance excludes Hess, the merger could elevate Chevron’s capital budget in 2025 as it incorporates Hess’ projects and aligns their operations. This potential uptick in spending underscores the importance of efficient capital allocation as Chevron balances growth and returns.

Looking ahead, Chevron’s cautious approach reflects broader trends in the energy sector, where companies are prioritizing financial discipline amid flat oil price forecasts. The focus on cash flow over drilling expansion mirrors strategies adopted by peers like Ovintiv. As Chevron navigates this environment, its ability to deliver consistent shareholder returns and manage major project risks will be critical to sustaining investor confidence and long-term growth.