Credit Suisse Raises Chevron's Target By $1, Notes Dividend Breakeven Continues To Fall

• Amid volatility, shares of Chevron Corporation CVX have lost 4 percent since January 4.
• Credit Suisse’s Edward Westlake maintained a Neutral rating for the company, while raising the price target from $83 to $84.
• The company’s cash flow generation is insufficient to cover the dividend, Westlake stated.

In 2015, Chevron generated $21.4bn of cash flow before working capital moves, with oil price at $52/bbl. While cash capex was $29.5bn, net debt increased by $10.7bn. Asset sales contributed $5.7bn. The dividend stands at $8bn. “Clearly something needs to change,” analyst Edward Westlake pointed out.

Chevron’s cash flow generation is not adequate to cover the dividend at current prices, Westlake commented, while adding that even against the backdrop of recession, the current lack of investment “sets up for higher oil prices eventually.”

Management seems to be “pulling the levers they can,” with capex expected to decline as projects get completed, volumes expected to grow through 2018, opex being reduced, and the company targeting $5-$10bn in additional disposals.

“The game plan would be to lower opex, reduce capex below the $20-24bn guide for 2017-2018 and bring on the new projects. We fade some of 2016 West Coast downstream cashflow gains in this analysis, but conclude that covering in the low $50's is plausible,” Westlake wrote.

While Chevron enjoys flexibility on spending in the longer term, the net-debt to cap ratio is likely to rise from low teens to 28 percent by 2018 at the strip. Disposals may be a partial offset. “With a portfolio the size of CVX, there are assets for which decent value might be secured (as long as a recession does not strike first),” the analyst said.