Chevron (CVX 1.87%) is profiting from the global economic and travel recovery. The company just reported $3.1 billion in net income and over $5 billion in free cash flow in the second quarter, almost entirely due to the snap back of demand for the fuel that moves people and goods around the world and creates the electricity the modern world depends on. And the reality today is that oil and natural gas meet most of that need.
But that reality is changing, and Chevron isn't standing still while the energy world changes around it. The company announced earnings on July 30, but a press release the day before announced something that could, in the years to come, be even more important for investors than they $3 billion in oil and gas profits it reported for the quarter.
Image source: Getty Images.
What Chevron announced, and why it matters
On July 29, Chevron issued a press release under the title "Chevron Announces Leadership Changes." Companies release these sorts of notices fairly regularly, and without putting much intellectual effort into it, this one might not seem like that big of a deal. But I think it deserves more scrutiny.
So what exactly did the company do? In short, it announced a new business that would be focused on low-carbon energy projects. The company appointed Jeff Gustavson, a 21-year veteran of the company and most recently VP of its North American Exploration and Production business, president of this new venture, which is called Chevron New Energies.
CEO Michael Wirth described this business unit as reflecting Chevron's "higher returns, lower carbon" strategy, and said that "... the dedication of resources in a new organization will accelerate growth in multiple business lines that we expect to be part of a lower carbon energy system."
Image source: Getty Images.
There are two things that underpin the significance of this move. First, Chevron New Energies isn't just a business that will be part of a larger segment, but will operate as a stand-alone business unit, with Gustavson now an officer and reporting directly to the CEO. It's clear that management -- and almost certainly the board of directors, which plays a major role in developing corporate strategy -- understands the significance of investing in low- and zero-carbon energy.
Second, it makes business sense. On Chevron's earnings call, CFO Pierre Breber pointed out that there's certainly regulatory reasons to invest in lower carbon, but many of Chevron's customers want lower-carbon energy sources, such as airline operators looking for renewable jet fuel.
Getting ready for the future and the present
Not to over-emphasize it, but the fact remains that Chevron's present, and a large part of its future prospects, remain tied to oil and natural gas and the products that are derived from them. The economic recovery that's underway, including the return to more normal levels of transportation both of people and goods, will be fueled by oil.
That's going to remain true for many years to come. It's also the source of cash that will fund Chevron's dividend, which yields over 5% at recent prices, along with the money it will spend to build a low-carbon energy business. One last point about Chevron's strategy here. On the earnings call, management stressed that the company isn't looking to jump into technologies like wind and solar, saying the company has no competitive advantages. Instead it will look to leverage technologies where its existing scale and expertise can pay off, like renewable fuels, clean hydrogen, and carbon capture.
Chevron won't be able to rely on fossil fuels forever. Making it a big enough corporate priority to create a new business, headed by a corporate officer who reports directly to the CEO, is an indication that Chevron is taking the reality of climate change -- or at least the implications for its business -- seriously. Investors should take notice.
