Barclays note on Chevron Corp. $CVX Talks Down $XOM
We think CVX’s 1Q result will have a positive impact on its near term share performance. Results were strong across the board and, in stark contrast to an uninspiring print by Exxon, Friday’s result was a tale of two cities, in our opinion. Excluding special items, CVX earned $1.90/share compared to consensus of $1.48 and our estimate at $1.57.
Additionally, Chevron’s reported CFFO (before working capital changes) of $7.1bn implies an annual run-rate of approximately $28bn at $65-70 Brent. This means that CVX’s cash flow breakeven to cover spending and the existing dividend sits at less than $50 Brent – a far cry from even just 2 years ago when the company required $70+.Exxon, on the other hand, reported far less impressive results.
While reported upstream earnings came in at a seemingly strong $3.5bn, the reported amount included a large asset sale gain of $366mn which contributed a positive variance of $0.09/share. CFFO implied a cash flow breakeven of $65-$70 Brent. As a result, even though CVX has already outperformed XOM significantly as of late (by 8% YTD and nearly 15% since early-February), we would not be surprised to see Chevron gain further ground in the coming weeks.
XOM’s relative competitive advantage appears to be deteriorating. Exxon has long been viewed as a best-in-class Super Major in the global oil and gas landscape. However, as we outlined in our report from 2/6/2018, “Downgrade XOM / Upgrade “, we think XOM’s upstream fundamentals have deteriorated significantly CVXrelative to Chevron in recent years. See Figure 5 on page 9 for a detailed summary.
We view the contrasting 1Q18 results by the two American mega majors as a preview of the upstream struggles Exxon may face going forward. We remain OW on CVX. The positive first quarter result was an encouraging sign that Chevron is executing well and we remain constructive on the company’s long-term, shareholder friendly plan. Following the strong quarterly result, we are increasing our price target to $145, which assumes a 15-20% premium to our NAV estimate and implies an average 2018-2022 free cash flow yield of 7% based on our estimates