Chevron Shares Look Cheap: Why the Oil Giant's Power Pivot Makes It a Compelling Buy

LONDON — Oil giant Chevron (NYSE: CVX) has underperformed the broader energy sector by a significant margin this year, delivering a return of just 16% while the S&P Commodity Producers Oil & Gas Exploration & Production index surged as much as 40% at its peak before settling to a 19% year-to-date gain. The underperformance stems largely from Chevron's heightened sensitivity to oil prices — a $1-per-barrel drop in the price of Brent crude costs the company approximately $600 million in cash flow. With Brent falling around $15 per barrel since the start of the month to $80, driven by continued progress in Middle East peace talks, the near-term headwinds are undeniable. Yet for long-term investors, the current share price weakness may represent an attractive entry point into a company that is no longer just an oil producer.

Beyond Oil: Chevron's LNG Powerhouse

Chevron is best known for its oil production, but its most exciting and structurally advantaged business is liquefied natural gas. The company does not disclose exact earnings from individual facilities, though it does break out upstream (oil and gas production) and downstream (refining and trading) segments. For 2026, UBS has pencilled in $20.4 billion of upstream earnings and $4.3 billion from downstream operations. Analysts estimate roughly 60% of upstream earnings derive from liquids production, with the remainder coming from natural gas and LNG.

LNG markets operate under fundamentally different dynamics from global oil markets. The enormous capital investments required to construct and maintain LNG facilities force producers to negotiate multi-year contracts with customers to secure a guaranteed return. Chevron's flagship Gorgon LNG facility in Australia, built in partnership with other energy majors, cost a staggering $55 billion in total. Of the approximately 4.1 million barrels of oil equivalent the company expects to produce in 2026, 80% is tied to long-term fixed contracts, while only 20% is sold on the spot market. These contracts, though fixed in structure, are not immune to market pricing — LNG contracts linked to Brent, for instance, adjust with a three- to four-month lag. UBS analysts calculate that for every $10 rise in Brent, Chevron receives roughly $450 million in after-tax earnings from production at its two major Australian LNG facilities.

The LNG Cargo Economics and Natural Gas Price Sensitivity

Crunching the numbers for individual LNG cargoes is challenging for those outside the industry, but the scale of profitability swings is extraordinary. According to Energy Flux, an industry news site, the profit on a single LNG cargo moving from the United States to Europe jumped from approximately $25 million to $50 million earlier this year as the spread between US and European natural gas prices widened due to Middle East supply disruptions. While global attention has fixated on Brent crude, Chevron's bottom line is increasingly tethered to US natural gas prices. The company estimates that a $1 move in the price of natural gas will add or subtract $700 million from its earnings. Since the beginning of April, US natural gas prices have risen nearly 30% to $3.2 per million British thermal units (MMbtu), driven by stronger demand.

Chevron also operates a smaller LNG facility in Angola, which UBS estimates could generate an additional $180 million boost in EBITDA for every $2 increase in the European gas benchmark. That benchmark has risen approximately $5 per MMbtu over the past six months, adding a tailwind that the market appears to be undervaluing.

Structural Demand Growth: The 2040 and 2050 Outlook

The long-term demand case for LNG is compelling. According to Shell, the world's largest LNG trader, global demand is projected to rise by 68% by 2040 under a best-case scenario and by as much as 85% by 2050, driven primarily by surging electricity requirements. The International Energy Agency (IEA) estimates that higher power demand from electric vehicles, data centres, and broader electrification will add the equivalent of two European Unions' worth of electricity consumption to global needs by 2030 — and only half of that incremental demand will be met by expanded renewable energy and nuclear power generation. The remainder must come from natural gas, creating a structural demand floor that benefits producers with large, contracted LNG portfolios like Chevron.

Moreover, LNG markets cannot rapidly adjust to demand shifts because it can take decades to plan, finance, permit, and construct a new liquefaction facility. This supply inelasticity provides pricing power to incumbent producers with existing operational capacity and contracted offtake agreements.

Power Solutions: The Microsoft Joint Venture

Perhaps the most underappreciated element of Chevron's transformation is its entry into the power generation business. The company has launched a joint venture with Microsoft called Power Solutions, marking Chevron's first direct move into selling electricity. The inaugural major deal, announced at the end of March, will see the partners develop a $7 billion, 2.5-gigawatt natural-gas-fired power plant specifically designed to support Microsoft's expanding network of data centres. The facility will be fuelled by natural gas supplied from Chevron's own assets and has been engineered with room to double in size to accommodate future demand growth.

Production is expected to commence in 2027, with Chevron's bottom line beginning to see the benefit from 2028 onward. Over the coming decade, Power Solutions could evolve into a significant profit contributor, yet this potential is not currently reflected in the share price. Chevron has articulated ambitions to build power plants totalling seven gigawatts of capacity in the coming years. Selling electricity on long-term fixed contracts to technology "hyperscalers" — the cloud computing giants that operate vast data centre fleets — will introduce a predictable, contracted revenue stream that reduces the earnings volatility that has historically weighed on Chevron's valuation multiple.

Valuation and Dividend: The Investment Case

Based on current projections, UBS analysts estimate Chevron shares are trading at a forward price-to-earnings ratio of 16.6 for 2027, falling to 15.8 for 2028, assuming a 4% increase in production. The dividend yield is forecast at 4% for the current year and 4.2% for the following year. For a company that is systematically de-risking its earnings profile through long-term LNG contracts and building an entirely new revenue pillar in power generation, these multiples appear undemanding. The recent decline in the share price, while painful for short-term holders, may offer patient, long-term investors an opportunity to accumulate a high-quality energy transition play at a discounted valuation.

This article draws on analysis first published in MoneyWeek magazine. Rupert is the former deputy digital editor of MoneyWeek and an active investor whose style has been influenced by Warren Buffett and Philip Carret, focusing on high-quality growth opportunities trading at reasonable prices with strong cash generation and solid balance sheets.

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