Spot prices for West Texas Intermediate (WTI) crude oil posted a year-to-date low of around $59 a barrel in January and a high of more than $75 in early June. Prices have dropped back to around $70 a barrel since then, but traded at a low near $65 in mid-June.

The country’s largest oil producers can make money at these prices. What they do with that money, however, has an effect on how analysts view and rate the firms. Bank of America Merrill Lynch Thursday morning dropped its rating on two producers, Chevron Corp. (NYSE: CVX) and ConocoPhillips (NYSE: COP), both lowered from Buy to Neutral. On Conoco the analysts cited valuation and on Chevron they cited capital spending and re-contracting risk.

Merrill Lynch explains its take on crude oil prices:

We have argued in recent weeks that with oil prices having recovered to $70 for both Brent and WTI, the tailwind from a recovery in oil prices has arguably played out. Investor confidence in the sustainability of this recovery has not necessarily followed, so that at current levels, we suggest the average oil price discounted stands at around $50 (WTI) leaving valuations across the sector as a whole notionally attractive. But we also contend absence of certainty on an increasingly volatile commodity means it is more appropriate to view absolute price objectives within a range rather than a single value. For our part, we suggest stocks trading +/-10% of fair value are less compelling vs more deeply discounted opportunities, with line of sight on the catalysts that could close the Gap.

Focusing on large-cap yields, the analysts favor Anadarko Petroleum Corp. (NYSE: APC), Exxon Mobil Corp. (NYSE: XOM) and Occidental Petroleum Corp. (NYSE: OXY), all of which are rated Buy. The following comments are based on Merrill Lynch’s base case, long-term oil price of $65 a barrel.

Anadarko

[W]e see compelling value for Anadarko, with a fivefold increase in dividend earlier this year and management’s recent commitment to share buy backs the catalyst we believe can close a value gap that stands at about 50% versus our [price objective] of $100. With a free cash yield that exceeds COP with a similar yield and higher top line growth trajectory, we see APC as the logical successor to the successful pivot towards capital discipline and shareholder returns that anchored COP’s recovery over the past year.

Exxon Mobil

[W]e see ExxonMobil with still the greatest combination of value and yield and long-term growth trajectory unmatched by other global oils.

Occidental

[A] unique combination of yield that looks more like a ‘major’ than E&P, but where growth from its Permian resource asset positions relative value above stocks with similar oil leverage.

ConocoPhillips

[W]ith the shares trading just 10% from our PO, we move our rating to Neutral acknowledging that beyond sustained commodity strength above our $65 base case, we see step changes in COP’s outlook that can reset our view of fair value.

Chevron

[A] review of a number of issues … lead[s] us to trim our [price objective] to $135; specifically uncertainty around production sharing contract (PSC) renewals in Asia and potential capital requirements for a new round of major capital projects that we believe risks the spending outlook higher vs market expectations post 2020. In addition, pushing out mid-cycle for CVX downstream to 2025, upside to our revised [price objective] of about 14% more appropriately positions CVX as Neutral vs more heavily discounted peers.

Merrill Lynch offered a final comment on exploration and production companies:

All other large cap US oil ratings are unchanged, although we maintain our view that with the tailwind from the commodity recovery having largely played out, sector strategy will become increasingly selective with catalysts that can drive relative outperformance as equally critical as absolute value. With this screened over absolute value, top E&P ideas include Devon, Hess, Noble, Concho and Continental.

WTI crude oil traded down about 2% in the noon hour Thursday to $67.35, following a mixed report on crude oil and refined products earlier this morning.

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