ExxonMobil, Chevron Fine…If You’re Happy With a 10% Gain

The folks at JPMorgan took a look at Chevron (CVX) and ExxonMobil (XOM) and came away feeling, well, unenthused. JPMorgan’s Phil Gresh and John Royall explain why they started ExxonMobil at Neutral…

Reuters

We initiate coverage of ExxonMobil shares with a Neutral rating and a December 2015 price target of $104/share. Within our integrated oil coverage universe, we see ExxonMobil as being more macro-oriented and defensive than peers. We see pricing (macro) as the main model driver, with some incremental help from margin levers like cost/mix. We also see some unique defensive characteristics at ExxonMobil, such as its top-tier FCF yield,
FCF/dividend coverage ratio and below-average financial leverage, which should allow for favorable return of capital versus peers in all of our scenario analyses. One additional lever to watch is acquisitions. The pool of candidates is vast and the desire to add inorganic reserves could grow if timing risks around Russian exploration grow; however, we expect a long-term, opportunistic orientation, given the likely ROCE headwind for any such deal. Thus, our base case assumes that ExxonMobil will hold its current course of top tier return of capital to shareholders, which could lead to a ~11% total return (including dividends) by year-end 2015 (group ~15%).

..and assigned the same rating to Chevron:

We initiate coverage on Chevron with a Neutral rating and a December 2015 price target of $133/share, which represents 12% total return potential, including dividends (group average 15%). Chevron has an attractive global asset base, with the potential for top tier production growth and margins versus global integrated peers, in our view. While FCF is currently negative as the Australian LNG investment phase peaks, a potential multi-year improvement could be ahead as these projects move into production mode. The post-2017 production outlook also looks favorable, with a balanced reserve profile and growth potential on several fronts (LNG, TCO, unconventional). That said, in the near term, based on our price forecasts that use the forward curve, our FCF improvement is still fairly moderate, going to ~$2.6B in 2016E from negative ~$3B in 2013, which could require incremental asset sales (beyond the $10B plan) and leverage to maintain
current share repurchase levels. On valuation, Chevron looks fair versus peers on 2016E, highlighting the importance of execution and capital allocation, in our view.

Shares of ExxonMobil have dipped 0.3% to $96.29, while Chevron is off 0.3% at $123.07.