Bank Of America Upgrades Chevron, Says ConocoPhillips Is Top Pick

• Chevron Corporation CVX has seen about 40 percent decline in its share price over the past year, with about a 32 percent decline year-to-date.
• Bank of America Merrill Lynch’s Doug Leggate upgraded Chevron from Underperform to Neutral, while lowering the price target from $104 to $100.
• The company’s underperformance over the past year has led to the stock now trading below its “major” peers, as well as discounting below the current strip prices.

Analyst Doug Leggate mentioned that there had been concern over the past year, regarding a dilution in the stock’s equity value due to high cash burn during a period when oil prices had collapsed. However, despite the decline in the share price, there does not appear to be any risk to the dividend.

“With the highest yield in a decade and what we view as an approaching inflection point in cash flexibility irrespective of current oil weakness investors get paid to wait,” Leggate elaborated.

According to the Bank of America report, the worst appears to be over for the stock. Chevron is expected to complete the rest of its cash burn over the next 18 months, with net debt rising by $13 billion till the end of 2016. However, the company’s net debt is likely to stabilize with major projects beginning to contribute in 2017 and a drop in spending to maintenance levels.

“By our analysis CVX requires sustained spending of ~$15/$16bn to hold production flat for an extended period,” Leggate explained, while adding, “At $45/$50 oil, cashflow by 2017 would be closer to ~$29bn, so that in an ex growth environment, the dividend is more than covered by cashflow.”

ConocoPhillips COP has been established as Bank of America Merrill Lynch’s Top Sector Pick. The stock was the “hardest hit” during the recent downturn, which the analyst believes reflected unwarranted concerns regarding ConocoPhillips’ dividend.

“We believe this also overlooks a step change in capital flexibility in 2015 as major capital spending rolls off, but the tailwind from associated projects start up over the next year,” the Bank of America report added.

At the current strip prices, Leggate believes that ConocoPhillips’ upside is secondly only to that of Exxon Mobil Corporation XOM.