Chevron Set For Better Capital Efficiency; Credit Suisse Hikes Outlook

Chevron Corporation CVX is up more than 4 percent on the day at $92.67 following a Credit Suisse outlook hike, which outlined that the company is in an ideal position for better capital efficiency moving forward.

According to the note, Chevron is reaching a "sweet spot," fueled by a "significant short cycle resource" and "higher share of long duration cashflows."

"While CVX will have to live with the excess capital employed caused by mega-project overruns, a key takeaway was the large and capital efficient brownfield opportunity," the analyst explained.

Related Link: Chevron Achieves First LNG Production At Gorgon

Maintains Neutral Rating, Price Target Up $12

Based upon the encroaching sweet spot, Credit Suisse said "CVX is moving in the right direction."

"Despite missteps on Major Capital Projects in recent years, CVX is now getting closer to a sweetspot," the analysts began, "[T]he capital intensity of the Majors is heavily influenced by the project cycle. Gorgon Train 1 seems to be starting well. Angola LNG follows in 2Q16, then additional trains of Gorgon and Wheatstone. As these projects ramp, then capex falls and cashflows rise. With lowered capex and opex, our target price rises to $96/sh (at the strip CVX shares would be worth in the mid $60's/sh, though costs would adjust)."

Credit Suisse concluded, "An adjustment for volumes (mix/level) and costs increases EPS in 2016/17 […] We have discussed in many reports over the last 5 years how CVX would eventually reach a crossover point where long-lived megaprojects would be completed, cashflow would rise, and management could steer the capex wheel towards shorter cycle & lower capital intensive activity.

"While free cashflow generation is somewhat of a moving target and dependent on project cycles/oil sensitivity, CVX is now at the top of the DAFCF leader board on our published 2018 forecasts for the Majors."