Argus Upgrades Chevron To Buy; Volatility In Oil Creates Better Entry Point

• Chevron Corporation CVX shares are down 17 percent year-to-date, and have been trading below the $100 mark since mid-June.
• Argus' John Eade upgraded the rating on the company from Hold to Buy, while maintaining a price target of $100.
• While the recent oil price volatility has created a better entry point, the company’s heavy investment is likely to pay off over the next three years, Eade stated.

The performance of Chevron’s shares over the past quarter has been strong, up 15 percent versus the market gaining only 5 percent. Analyst John Eade mentioned, however, that the shares have underperformed over the past year, down 17 percent versus the market being flat. He added, “We had been waiting for a better entry point, and the recent volatility in oil prices has created one.”

Chevron recorded a sharp decline in 3Q earnings and cash flow, primarily due to lower realized oil prices in the Upstream business. The weak performance of the Upstream business was offset in part by higher earnings in the Downstream business, which were boosted by lower feedstock costs.

Eade pointed out that of the four supermajors - BP plc (ADR) BP, Royal Dutch Shell plc (ADR) RDS, Exxon Mobil Corporation XOM and Chevron - the latter has the most leverage to the Upstream segment. He commented, “As such, it has seen an outsized negative impact, relative to peers, from the sharp fall in oil prices.”

Chevron’s free cash flow is expected to be negative in 2015 due to the recent sharp decline in oil prices and continued heavy capital spending. Eade added, however, that management had outlined its plans for the next three years and “we believe that the company’s period of heavy investment will pay off.”

The EPS estimates for 2015 and 2016 have been reduced to $3.35 and $3.25, respectively, to reflect a steeper decline in oil price than can be offset by management cutting costs.

In the report Argus noted, “Over the next three years, while global oil growth catches up with global oil supply, the company expects to reclaim its position as the number-one upstream supermajor in terms of production growth and per-barrel profitability. In addition, as the capex program winds down and the company focuses on cost reduction, it expects free cash flow to turn positive by 2017.”

Eade believes that oil prices are near the bottom of their forecast trading range for 2016 and could trade higher over the year.