Outlook improved, but we prefer Oxy among low-beta large-cap oils April 30, 2007
Goldman Sachs
What's changed
Chevron reported adjusted 1Q 2007 EPS of $1.86, ahead of the $1.67 both we and the First Call consensus expected. Higher international R&M earnings and lower corporate charges accounted for the bulk of the variance versus our estimates. We have made minor changes to our 2007 quarterly EPS estimates for Chevron as follows: $2.22 ($2.14 before) for 2QE, $2.01 ($2.04 before) for 3QE, and $1.71 ($1.77 before) for 4QE. Our new full-year 2007 EPS estimate is $7.80 ($7.62 before).
Implications
Relative to recent years, we have a more positive view of Chevron’s outlook. As discussed in greater detail in our March 5, 2007 company update report, “Chevron: Is an E&P deal needed or will sustained growth materialize in 2008?”, we see Chevron’s ability to deliver on its growing E&P portfolio as a key driver of its share price versus other super-cap oils. While 1Q 2007 was roughly flat with last year, for full-year 2007 we are looking for E&P production to fall 2% before growing 2% in 2008 and 7% in 2009. While the promise of out-year production growth has existed for most of this decade, we think Chevron is as close to actually achieving this goal as it ever has been. Beyond E&P volume growth, we view favorably the company’s competitive ROCE and growing share buyback program.
Valuation
We continue to rate the shares Neutral, as Chevron is trading near our revised $77 ($73 before) 12-month target price, which is based on asset value, cash flow and P/E valuation analyses. Chevron trades at 5.9X 2008E EV/DACF and 8.8X 2008E P/E, which compare with respective peer group averages of 6.0X and 8.3X. We consider Chevron’s closest peers to be ConocoPhillips, Exxon Mobil, and Occidental Petroleum. Or this group of low-beta large-cap integrated oil companies, Oxy is our Buy-rated favorite.
Key risks
Key risks are lower oil prices and weakness in the S&P 500. |
