U.S. oil prices have soared 19% over the past three months. Chevron has jumped 29% during that period, and Exxon has climbed 19%.
RBC Capital Markets analyst Biraj Borkhataria has conflicting views on the companies. He just upgraded Exxon to outperform from sector perform, lifting its price target to $100 from $90. Exxon recently traded at $87.08.
But he downgraded Chevron to sector perform from outperform, though he increased the price target to $165 from $160, reflecting recent activity. Chevron recently traded at $164.90.
“[Exxon] will be one of the key beneficiaries of a tight refined oil products market,” Borkhataria wrote in a commentary.
Strength as Refiner
“XOM has two key advantages relative to peers: it is the largest refiner among the majors, and it screens well on upstream portfolio longevity, an area we expect to be under increased scrutiny in a high commodity price environment.” Upstream means oil and natural gas exploration and production.
Exxon’s earnings momentum is likely to continue, Borkhataria said.
“XOM has gone from the brink of a potential dividend cut in 2020 to a more balanced financial framework in 2021, and now [has] significant free cash flow potential in 2022,” he said. That’s thanks to soaring commodity prices and geopolitical instability.
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In addition, “given a supportive macro backdrop and headwinds to other sectors, … focus could shift away from the majors’ energy transition plans, and back to core businesses,” Borkhataria said.
As for CVX, its stock has gained more than any other major oil producer in recent months, he said.
“This has been a safety trade alongside strong commodity prices. We now see the risk-reward much more balanced.”
While Borkhataria anticipates commodity prices will stay high, “the current valuation leaves less room for positive surprise, while headwinds with Tengiz realizations could weigh on earnings relative to peers.”
Tengiz is a Kazakhstan oil field in which Chevron has a stake. It accounts for more than 10% of Chevron’s production, Borkhataria said.
Chevron still looks attractive, but the attractiveness is already reflected in its valuation, he said.
“On our updated estimates, CVX trades at a nearly-60% premium to the super-major peer group on enterprise value-to-debt-adjusted cash flow, nearly the highest [premium] in multiple decades.”
“The market has punished energy names with Russian exposures,” Borkhataria noted. “While CVX doesn’t have direct exposure to Russian operations, its Tengiz volumes in Kazakhstan are transported through the CPC pipeline which runs through Russia, and are exported via a Russian port.”