Chevron's Attractive Qualities Don't Warrant Overly Optimistic Cash Flow Estimates

Chevron CorporationCVX

's ramp-up in the Permian region isn't a bullish sign for the stock, RBC Capital Markets said in a research report. On the contrary,

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Biraj Borkhataria

downgrades Chevron's stock rating from Sector Perform to Underperform with a price target slashed from $112 to $100 due to company's "ambitious"

ramp-up trajectory in the Permian Basin. Specifically, the oil giant's free cash flow and returns will be impacted, and the Permian region won't be a meaningful contributor until "well after" 2020, the analyst noted. In fact, the Street's cash flow estimates are already too optimistic over the 2017–2018 period and the analyst's cash flow estimates are 9 percent and 13 percent below consensus, respectively.

Meanwhile, should oil prices remain flat at $50 per barrel, Chevron may need to turn to asset sales for continued dividend coverage over the coming years, the analyst added. At a range of $40 to $50 per barrel, Chevron could see the most downside across the entire oil sector relative to consensus estimates.

Over the much longer term, Chevron does boast an "enviable" but undeveloped position in the Permian which will naturally provide optionality and volume growth — but near-term considerations can't be ignored.

"We can see the attractions of the company, however we see potential downside to estimates over 2017/18, and also expect the returns profile to deteriorate relative to European peers, which could put Chevron's premium relative rating at risk," the analyst concluded.

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