XOM, CVX Strategy Preview
Unconventional Thinking
26 pages, 33 exhibits
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First page:
Bottom line: We think unconventionals will be a key theme of Big Oil’s strategy
presentations. As we laid out in our Big Oil CFPS to Rise 50% Let’s Do the
Math(s) report, the strategy presentations are also an opportunity for
managements to challenge the conventional thinking about the majors’ outlook.
Inside we have expanded our analysis of “franchise assets” and upstream
cashflow per barrel trends across all the larger cap producers. We conclude:
(1) Although it is easy to use production growth as a proxy for value creation,
cashflow margins on new production are generally higher than on existing
barrels and so cashflow growth will outpace production growth in coming years.
(2) The increasingly long plateaus of new projects should result in a period of
better financial performance. XOM flagged at its 2011 Analyst Day that decline
rates had fallen across the portfolio to 3% from 5-6% pa due to non-
conventionals and a rising share of long lived projects.
(3) XOM could grow its US non-conventional portfolio to over 1mboed (6bcfd
equivalent) by 2020 from 0.5mboed in 2010. More importantly, XOM has
1.4mboed of growth projects (80% of which are oil) in it’s project portfolio (Kearl,
Sakhalin, Syncrude, Kashagan, PLNG, Gorgon).
(4) Although we remain positive on the longer term cash generation potential of
the Majors, we feel 2012 is a year when the liquids rich Independent E&P’s
catch up. Capex at the majors will depress free cashflow yields for some time.
Indeed, faster growth at the Independent E&P’s will drive their multiples below
the supermajors by 2014.
Focus on XOM: Overall, we think the market might be underestimating XOM’s
liquids growth and the growth from North American shale, with international
shale contributing over a longer term horizon. XOM’s shares have always
traded at a premium versus the group. XOM’s higher capital spend relative to
its history should also act as a drag on multiples. However, for those who care
less about valuation and more about growth, this growth is being
underestimated.
Focus on CVX: For CVX, we believe the focus on mega-projects will remain.
Given the high cashflow per barrel and long life on these projects, we show
inside how this could lead to significant upside - up to $150-160/sh as mega
projects get closer. At the margin, we think CVX will provide additional color on
the next wave of projects beyond 2017 and global shales. This could quiet
down M&A chatter. We don’t anticipate any reversal of management’s slow and
steady stance on distributions – CVX will keep excess cash on the balance
sheet until its high capex program comes to a close. |
