Chevron Corp. (CVX): Remains a Buy-rated favorite, as majors look very inexpensive - Goldman Sachs - May 02, 2008
What's changed
Chevron reported 1Q 2008 EPS of $2.48, just ahead of the $2.41 First Call consensus projection and essentially in line with our $2.50 forecast.
Implications
We reiterate our Buy rating on Chevron and continue to believe the super majors in general, and Chevron specifically, are very inexpensive relative to
(1) the current price of oil,
(2) our expectation for future oil price gains, and
(3) the level of the S&P 500.
We believe that as the Street gains comfort that WTI oil prices will remain above $100/bbl, positive EPS revisions will drive the shares of major oil companies higher. We continue to believe the market is overly pessimistic that a combination of production sharing contract effects, higher costs, and weak downstream earnings will outweigh oil price gains for major oil companies. While we agree that the factors mentioned do offset a portion of any oil price gains, overall we see EPS rising for the major oils. Regarding Chevron specifically, we believe the company is getting closer to the long-delayed positive inflection point in E&P volumes. Our current forecasts include 2H 2008 volume growth of around +1% followed by +6% growth in 2009. While a particularly dramatic spike in oil could result in lower reported volumes relative to our current forecasts, most importantly we would expect any volume shortfall to be more than compensated for by the higher oil prices that drove the shortfall in the first place. Ultimately, higher profits should trump any volume offsets, so long as project execution is favorable as we expect.
Valuation
We see 24% total return upside to our unchanged $115, 12-month target price, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is sustained lower commodity prices. |
