Why Jefferies Sees Even More Upside in Chevron

Despite the rocky drop in oil prices over the past year, Chevron Corp. (NYSE: CVX) still remains a top pick in the integrated oil sector for one key analyst. The company is positioned to generate the highest organic production growth among its peers, and it has the most dramatic cash cycle inflection in the sector.

Jefferies believes that Chevron’s free cash flow generation should improve significantly through 2018 via a combination of lower capital spending, production growth and margin expansion. The firm expects that this major inflection in the cash cycle will allow Chevron to fund its dividend with free cash flow with a Brent oil price as low as $50 per barrel.

Chevron has utilized its balance sheet to navigate the low oil price environment at a time of high capital spending. However, leverage remains very manageable, and Jefferies expects net debt to capitalization to peak at 19% at the end of this year. Even within the context of the current low oil price environment, the company’s liquidity and financial flexibility are robust.
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The brokerage firm detailed in its report:

Multiple major capital projects are near completion and should underpin a production CAGR of 5% from 2015-2018. Further, the new sources of production generate cash margins that should be accretive to the existing portfolio. With the finish line in sight it is incumbent on the company to deliver these projects in order for the stock to outperform. Short cycle activity (shale/tight drilling and base decline mitigation) supported by the company’s strong Permian Basin portfolio grows to near 60% of capital spending by 2017, versus 37% in 2015.

Jefferies has a Buy rating with a $110 price target, implying upside of about 17% from the current price level. The firm believes the key risk to its Buy thesis over the next 12 months is project execution risk, particularly at Gorgon and Wheatstone. Chevron is also at risk from falling commodity prices.

Shares of Chevron were trading at $94.02 on Monday, with a consensus analyst price target of $97.84 and a 52-week trading range of $69.58 to $112.20.