Energy Pair Trade? Credit Suisse Downgrades Phillips 66, Hikes Chevron Targets

• Phillips 66 PSX shares have climbed 14 percent in the past one month, while shares of Chevron Corporation CVX are up 16 percent.
• Credit Suisse’s Edward Westlake downgraded the rating on Edward Westlake Phillips 66 from Outperform to Neutral, while raising the price target for Chevron from $87 to $100.
• While the rally in Phillips 66 shares calls for a reduced rating, Chevron’s capex cut underscores dividend sustainability and supports the upward revision in the price target, Westlake said.

Self-Help Already Priced In

Analyst Edward Westlake downgraded the rating on Phillips 66, while establishing a price target of $105. He said that while the rally in shares was “a thoroughly deserved” one, the current valuation already prices in the positives.

Phillips 66 demonstrated earnings power in 3Q, with less maintenance impacts. Higher-than-expected results, a strong management team, share repurchases and progress executing a sound strategy have resulted in a spike in the company’s shares.

“From a structural perspective, PSX is the best positioned company in the group – exposed to the faster growth in the NGL and chemical business,” Westlake wrote. Substantial self-help can be expected through 2H16-2018, possibly driving EBITDA over $9bn in 2018, with more growth ahead.

Westlake added, however, that the “at least some of this self-help is priced in” and that “there is greater refining leverage in other names.”

Dividend Sustainability

Westlake maintained a Neutral rating on Chevron, while raising the price target to $100. Chevron always seemed to have substantial capital flexibility and “it was good to see management get on the front foot,” the analyst commented.

The company has reduced its 2017 capex plans from $29bn to $20-$24bn. “With lower opex and lower capex, the dividend math works in the $50's Brent.”

Moreover, Chevron has raised its disposal target, which provides a cushion against a more prolonged downturn and boosts its capital flexibility “to take advantage of counter-cyclical opportunities,” the Credit Suisse report noted.

Westlake mentioned, “On our $70/bbl Brent forecast, CVX shares would be worth $100/sh. This is higher than our prior target due to cumulative capex savings, with opex savings helping to offset slightly lower volumes.”

The EPS estimates for 2015, 2016 and 2017 have been raised from $2.96 to $3.27, from $3.27 to $3.55, and from $5.14 to $5.45, respectively.