HSBC downgrades Chevron Corporation (CVX.US) rating to "hold": While performance exceeds expectations, the valuation feast may be coming to an end.

HSBC recently released a research report, downgrading Chevron Corporation (CVX.US) from "buy" to "hold" and raising the target price from $169 to $180, corresponding to about 2% upside potential. Behind this adjustment is HSBC's cautious weighing of the tension between Chevron Corporation's fundamentals and valuation - recognizing its cash flow growth and financial discipline, but believing that the current stock price already fully reflects the positive factors. Looking at the performance in the fourth quarter of 2024, Chevron Corporation delivered results that exceeded market expectations. Adjusted earnings per share exceeded market consensus by 6%, upstream business post-tax net operating profit of $3.2 billion exceeded market expectations by 7%, and total production of 4.05 million barrels/day also exceeded consensus by 2%. This performance benefited from strong operational performance in TCO, the Permian Basin, and the Gulf of Mexico, with quarterly repurchases totaling $3 billion at the upper limit of the guidance range of $2.5-3 billion. However, downstream post-tax net operating profit of $ billion was lower than market expectations by 9 billion, with weakness in the US business offset by growth in international business. In terms of structural cost reduction, Chevron Corporation has achieved $1.5 billion in cost savings in 2024 and is confident in achieving a cumulative target of $3-4 billion by the end of 2026, with over 60% coming from sustainable efficiency improvements rather than one-off disposals. This path is consistent with the "risk-free growth, leveraging technology" strategy proposed by the company at the 2025 Investor Day. Capital spending guidance is maintained at $18-19 billion, at the low end of the range of $18-21 billion for 2026-2030, with the TCO project expected to contribute $6 billion in free cash flow at $70 per barrel of Brent oil price. Production growth is a key part of Chevron Corporation's narrative. Upstream production is expected to grow by 7-10% in 2026, but temporary declines of 185-255,000 barrels/day are expected in the first quarter due to maintenance of facilities in Kazakhstan and the impact of winter weather in the US. The more noteworthy aspect is the Venezuela business - CEO Mike Wirth reiterated that with additional authorization from the US government, production could grow by 50% in the next 18-24 months, from the current 200,000 barrels/day to about 300,000 barrels/day. However, HSBC points out that even if this goal is achieved, considering that the Venezuela business accounts for only 1-2% of the group's cash flow, and with an increase of about 120,000 barrels/day, the impact on overall valuation is limited. This assessment contrasts subtly with the market's optimistic expectations for political easing in Venezuela with GEO Group Inc. The change in valuation logic is the key to the downgrade. Chevron Corporation's stock price has risen by 16% since the beginning of the year, second only to Exxon Mobil Corporation among comprehensive oil giants, outperforming peers by 5 percentage points. This increase is mainly driven by expectations for Venezuela and the rebound in oil prices, but HSBC believes that the current valuation has already priced in the positive factors - Chevron Corporation's enterprise value/discounted cash flow ratio for 2026 has narrowed to a 2% discount to Exxon Mobil Corporation, considered a reasonable level. In terms of shareholder returns, quarterly dividends have been raised by 4% from $1.71 per share to $1.78 per share, annualized at about $14 billion, but the 7.2% distribution yield for 2026 lags behind BP p.l.c. Sponsored ADR and Total's around 8.5%, and Shell's over 10%, widening the gap with European peers. On the technology front, Chevron Corporation's application of chemical enhanced oil recovery technology in the Permian Basin is accelerating, with plans to increase the utilization rate of new wells from 40% in the first half of 2025 to nearly 85% by the end of 2025 and 100% by 2027, with the goal of doubling shale oil recovery rates. The Ballymore and Whale projects in the Gulf of Mexico are set to start production in 2025, along with the Anchor project ramp-up, they are expected to help achieve the production target of 300,000 barrels/day by 2026. The final investment decision for the expansion of the Leviathan gas field in the Eastern Mediterranean was reached in mid-January 2026, with production expected to reach 2.1 billion cubic feet per day by 2030, doubling profit and free cash flow. In terms of financial forecasts, HSBC has lowered its net profit forecasts for 2026 and 2027 by 20% and 10% respectively, reflecting higher depreciation and amortization expenses, upward revision of company cost guidance, decline in refining profits, and adjustment of WTI oil price assumptions from $62 to $61. It is worth noting that while the increase in depreciation erodes profits, it does not affect cash flow, so the adjustments to cash flow forecasts are relatively small, with a decrease of 4% and an increase of 1% for 2026 and 2027 respectively. Current forecasts are 5% and 10% below Bloomberg consensus, with the gap widening in 2027. The balance sheet remains healthy. The net debt-to-equity ratio at the end of the quarter was 15.6%, slightly higher than the 15.1% at the end of the third quarter, but still well below the target range of 20-25%, providing ample room for dividend growth and potential leverage. TCO loans of $1 billion were repaid in the first and third quarters of 2026, totaling $2 billion for the year. In conclusion, HSBC believes that Chevron Corporation has transitioned from a "valuation gap" to a "reasonable valuation". While still optimistic about its project execution and capital discipline in the long term, the short-term upside potential is limited, and investors need to reassess the balance between growth quality and price. For investors seeking higher shareholder returns or greater valuation flexibility, European peers may offer a better choice.