Morgan Stanley Upgrades Chevron On Long-Term Bullish Project Initiations, Permian Short-Cycle Benefits

Chevron Corporation CVX has “the most differentiated growth and free cash flow outlook,” Morgan Stanley’s Evan Calio said in a report. He upgraded the rating on the company from Equal Weight to Overweight, while raising the price target from $113 to $130.

Chevron’s differentiated production growth and FCF profile stems from the long-cycle project startups. “Concurrently, CVX's longer-term return profile and execution benefit from the largest shift to short-cycle investing, particularly core Permian,” Calio wrote.

An article in Seeking Alpha mentioned Chevron was looking better than Exxon Mobil Corporation XOM following the earnings release.

Threefold Differentiation

1. Calio believes Chevron is poised for the largest FCF inflection in 2017–2019 due to the project startups. He added that startups and subsequent ramps of these long-cycle projects could add ~400 million boed [Barrels of Oil Equivalent per Day] by 2018 and reduce capex by $7 billion–$8 billion year-over-year in 2017. “This is the largest FCF inflection in the group,” Calio added.
2. The company’s ability to most effectively use future cash flows in the core Permian, which is the “best short-cycle opportunity globally.”
3. Chevron has “higher oil leverage into a cyclical price recovery,” the analyst added.

Chevron’s investments and growth will likely shift to shorter-cycle opportunities going forward, lowering execution risk, improving capital efficiency and increasing return on capital, Calio noted. He added that the company is likely to offer the highest dividend cover in the group, at 170 percent in 2017–2018 versus the peer average of 100 percent.

Similarly, Goldman Sachs’ Neil Mehta mentioned three reasons to Buy Chevon in a recent report.