Chevron (IL/A): Shares can make sense for long-term investors, but we prefer COP, OXY, and XOM among integrateds - Goldman Sachs - April 28, 2006
With Chevron trading at 4.8X 2007E EV/DACF, versus the respective super-cap integrated oil and domestic oil/E&P averages of 5.7X and 5.2X, we believe its shares can make sense for long-term, value-oriented investors given the resiliency of major oil companies' business model over multi-year periods. However, in our view the challenge with a contrarian call relative to investors' "de-rating" of CVX is precisely that: barring extraneous events, we believe it could take an extended period of time for a major oil company to regain investor confidence in its long-term outlook. We remain IL/A rated on CVX as we see more favorable risk/reward in other super-cap oils today. Our view on CVX shares could turn more positive if management can show it is solidly back on-track to deliver superior risk-adjusted returns or if its shares trade at a more meaningful discount relative to its peers.
CHEVRON APPEARS INEXPENSIVE, BUT WE PREFER CONOCOPHILLIPS, EXXON MOBIL, OR OCCIDENTAL PETROLEUM TODAY
Among "super"-cap oils, we continue to prefer shares of ConocoPhillips (OP/A) for refining-leverage and higher-beta commodity exposure, Exxon Mobil (OP/A) as the superior low-beta offset to our otherwise bullish oil/gas/refining outlook, and Occidental Petroleum (OP/A) as a domestic oil/E&P stock that we believe should be compared to the major oils given its returns characteristics. We continue to believe that Chevron's de-rating following evidence that its fundamentals could be deteriorating is not unreasonable. We estimate Chevron trades at 4.8X 2007E EV/DACF, which compares to the respective Conoco, Exxon, and Oxy EV/DACF valuations of 5.1X, 6.8X, and 5.4X. On an absolute basis for Chevron, we see 29% upside to a $75 "traditional" peak value, which assumes a $45/bbl long-term WTI oil price, and 66% upside to a $98 "super-spike"-adjusted peak value, consistent with discounting a $60/bbl long-term WTI oil price.
DOES CHEVRON NEED TO MAKE ANOTHER E&P ACQUISITION?
With continued declines in its production volumes, poor organic reserve replacement in recent years, and a very healthy balance sheet, we believe Chevron is likely to make additional E&P acquisitions in the years ahead. Two areas we have thought the company would look to build up include Canada's oil sands and onshore North America natural gas. Regarding the former, Chevron's recent acquisition of heavy oil leases in the Athabasca region in northern Alberta likely reduces the potential for an oil sands-related company acquisition. In terms of North America gas, we believe the combination of tightening fiscal regimes outside of North America and a continued bullish outlook for prices/returns in North America will cause many of the super majors to re-think their approach to North America natural gas as we saw late last year with ConocoPhillips' acquisition of Burlington Resources.
1Q 2006 RESULTS IN-LINE WITH EXPECTATIONS
Chevron's 1Q 2006 EPS of $1.80 (on both reported and adjusted basis) was largely in-line with the $1.78 both the First Call consensus and we forecast. The positive variance was primarily driven by slightly higher than expected E&P earnings, somewhat offset by R&M earnings that were slightly below expectations. E&P volumes were in-line at 2.644 million BOE/d versus our 2.648 million BOE/d forecast.
UPDATED ESTIMATES
We have raised our full-year 2006 EPS estimate for Chevron to $7.97 ($7.95 previously) to reflect actual reported 1Q 2006 results. We have made no change to our 2Q-4Q 2006 and our full-year 2007-2010 EPS estimates based on several minor modeling adjustments to Chevron's E&P production profile, assumed corporate charges, R&M earnings, and price/margin realizations.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Arjun Murti, Luis Ahn. |
