On October 7, 2020, Chevron (CVX.US) surpassed Exxon Mobil (XOM.US) for the first time in market cap, becoming the largest publicly traded oil company in the USA at the time. In this context, Chevron CEO Mike Wirth also became the 'king of American oil giants', and Wirth's 'honeymoon period' with Wall Street reached its peak.

However, the good times didn't last long as Exxon Mobil reclaimed the market cap crown, with its market cap now almost double that of Chevron. Worse still, Exxon Mobil has drawn Chevron into a long-standing arbitration battle, which could jeopardize Chevron's acquisition deal with Hess (HES.US) valued at over $60 billion.

The well-regarded Wirth is now facing scrutiny as a result. But this 64-year-old industry veteran is launching a charm offensive to prove the naysayers wrong. In an interview, he told the media, "Our portfolio is stronger than ever. It's a comeback."

Though the road to redemption is not easy, renowned oil and gas analyst Javier Blas, after hearing Wirth's views and speaking with numerous shareholders, bankers, and analysts over the past few weeks, stated that Chevron has the opportunity to rebuild its relationship with Wall Street by 2025. However, the company has little room for error.

Blas points out that Chevron is far from the survival crisis critics claim. In the third quarter, the company returned a record $7.7 billion to shareholders through dividends and share buybacks. Its stock price has also risen: Chevron's stock is approaching $160 per share, up more than 10% from last year.

A few days before Chevron relocated its headquarters to Houston, Wirth delivered a speech in the suburbs of San Francisco, painting an optimistic picture. As he said, Chevron's cash inflow to outflow ratio is at a 'turning point'. If oil prices stay above $70 per barrel, from 2025 onwards, with several projects coming online, the company should generate a substantial amount of cash, moving into a harvesting mode. Chevron has promised investors to increase free cash flow by 10% annually. This target seems achievable; if successful, magic will return.

High capital expenditures and production project issues

However, challenges are abound.

When Wirth became the CEO of the company in 2018, he inherited a troublesome 'legacy'. Under the leadership of former CEO John S. Watson, Chevron had become synonymous with project delays and budget overruns. Capital expenditures soared from less than $20 billion annually before 2010 to around $40 billion in 2013, 2014, and 2015. Wirth defended his extravagant spending with a new vision: high oil prices will be the norm.

However, a surprise move by Saudi Arabia disrupted the company's plans. At the end of 2014, Saudi Arabia launched a price war to curb the expansion of the U.S. shale industry. Oil prices dropped to less than $30 per barrel, putting Chevron in a difficult situation. Wirth significantly cut expenses and reassured investors that the days of lavish spending were gone. Some investors were skeptical, but he did fulfill his promise.

Gradually, shareholders regained confidence. Then in 2019, Wirth attempted to acquire competitor Anadarko for $50 billion, including debt. However, Occidental Petroleum (OXY.US) bid $57 billion to participate in the acquisition with the help of Buffett. Instead of starting a bidding war, Wirth chose to step down, pocketing a $1 billion breakup fee. This move solidified his appeal on Wall Street: he put financial prudence above personal interests.

To maintain favor on Wall Street, all Wirth needed to do was to repeatedly emphasize: control costs, deliver projects on time, and achieve oil production goals. Senior oil analyst Paul Sankey likes to say, 'Repetition is reputation.'

But Chevron did not keep its promises. The first setback was the expansion of the Tengiz project in Kazakhstan, considered the crown jewel of the company. When announced in 2016, the project was planned to cost $37 billion and start producing the first batch of oil in 2022; but as of now, it has yet to be delivered, with oil extraction scheduled for next year, with costs skyrocketing to over $45 billion. Wirth admitted he made a mistake, indulging a 'optimistic' culture that ignored challenges.

The second setback occurred in Chevron's 'backyard' - the Permian Basin, the epicenter of the U.S. shale oil revolution. Wirth had set a grand goal of producing 1 million barrels per day by 2027, but in 2022 and 2023, the company faced difficulties. In hindsight, it was a minor hiccup, as production is back on track now. However, Chevron did not explain this at the time, causing some investors to hesitate.

Decisive factor: Hess acquisition issue

However, these two setbacks, compared to the third setback - the ongoing $60 billion acquisition of Hess Corporation - seem insignificant. The transaction was announced in 2023 and is the boldest deal attempted by Wirth, which will give Chevron shares in a series of valuable oil fields off the coast of Guyana. Guyana is a Latin American country bordering Venezuela and Brazil. The problem is that Exxon Mobil owns a large number of the same oil fields and claims the right to bid first.

Since the beginning of this year, the two largest oil and gas producers in the United States have been involved in legal arbitration over the largest oil discovery in the world in the offshore regions of Guyana in the past 20 years. This so-called 'century battle' between the two American oil and gas giants is at stake, as it could potentially disrupt whether Chevron's massive acquisition of U.S.-based oil and gas producer Hess Corp. can eventually be completed. The oil and gas assets in Guyana are one of the core objectives of Chevron's acquisition of Hess.

Exxon Mobil discovered the large oil and gas field in Guyana in 2015 and owns up to 45% of the project. Exxon Mobil has been questioning Chevron's acquisition since the beginning of this year, hindering the acquisition project. After Chevron successfully acquires Hess, it will obtain a controlling interest in Hess Corp and approximately 30% of the large oil and gas fields in Guyana, a deal that will determine Chevron's future.

The focal point of the current controversy is a private contract between Exxon and Hess that governs the large oil and gas field project in Guyana. It includes a 'right of first refusal' clause, which means that if one party wants to sell its shares, it must first offer them to other key project participants.

Exxon, Chevron, and Hess have tried to resolve their differences privately, but this case will now enter the arbitration phase in June next year, with a ruling possibly made in July or August. For many industry insiders, Exxon Mobil delaying Chevron's deal with Hess for at least a year, even if it ultimately loses in arbitration, is already a win.

Nevertheless, both sides face risks, even for Exxon Mobil, as the arbitration approaches, Blas believes that the motivation to reach an out-of-court agreement will increase. But Wirth disagrees with this view. All of these choices have pros and cons, but most importantly, they are uncertain.

If someone believes that Wirth will win in arbitration, then buying Chevron stock today is a wise choice. But if Wirth does not win, people must believe that the CEO will not rush into an expensive acquisition deal to offset the losses from the Hess transaction.

In response, Wirth said: 'Chevron's standalone story is very, very strong. Therefore, even if the deal is not completed, we don't believe this will happen. I think our track record shows that we won't go all in and just throw money at something.'

But it is hard to imagine that, without acquiring Hess, Chevron would not seek acquisition. Although Wirth may do it on his own terms and timeline without overpaying. Without these additional factors, investors would question Chevron's growth in the coming years. The Permian Basin is a great narrative, but production in the region is expected to level off by 2027; Tengiz is now an excellent story for 2025, 2026, and 2027, but over time, shareholders will begin to question the renewal of the field contracts, which expire in 2033. Acquiring Hess solves these issues, which is why it is so crucial.

Strong free cash flow

Wirth insists that Chevron is a better company than what opponents depict, and this makes sense. Firstly, it acts as an ATM: between 2011 and 2014, with the Brent crude averaging nearly $110 per barrel, Chevron generated an average of $3.9 billion in free cash flow per year. Despite last year's Brent crude trading at around $80 per barrel, Chevron's free cash flow still reached nearly $20 billion, five times the previous amount.

Chevron's leverage is about 12%, and due to asset sales, it may drop to single digits in the fourth quarter. If oil prices fall, Chevron can maintain dividends and buybacks by borrowing. In the past, the company increased leverage to 20% to 25% during economic downturns. However, debt-financed payouts pose risks, so if oil prices drop below $70 per barrel, Chevron should consider reducing the buyback scale. The company is currently repurchasing stocks at a rate of $17 billion annually, close to the upper end of its $10 billion to $20 billion annual guidance target.

This financial strength, coupled with Wirth being an executive who would rather walk away from a deal than overbid, is the best remedy to dispel investor doubts. Chevron has acknowledged its mistakes, which is a good first step. Now, it needs to demonstrate that it has learned its lesson.