Why Analysts See Exxon Mobil and Chevron Differently After Earnings
Paul Ausick
In the past week or so, the two U.S.-based supermajor oil companies have reported lower than expected earnings, and shares of both have paid the price. Since Chevron Corp. (CVX) reported earnings on January 27, its shares have dropped 3.1%. In the same period, shares of Exxon Mobil Corp. (XOM), which reported earnings January 31, have dropped by 2.1%.
Chevron reported a net loss of $0.27 per share for 2016 and and revenues of $114.47 billion compared with 2015 earnings per share (EPS) of $2.45 and revenues of $129.93 billion. Analysts had forecast EPS of $1.38 and revenues of $117.12 billion.
For the full year Exxon reported EPS of $1.88 and revenues of $226.09 billion compared with 2015 EPS of $3.85 and revenues of $268.88 billion. Analysts were forecasting EPS of $2.19 and revenues of $230.92 billion.
Analysts' reactions to the quarterly and full-year results varied, with many looking favorably at Chevron while looking less favorably at Exxon. Production is expected to rise at both companies and so are margins as commodity prices rise.
Edward Westlake at Credit Suisse rates Chevron as Neutral with a price target of $120. Here's how he sees Chevron going forward:
[Chevron is e]ntering A Period of Stronger Free Cash Generation Despite 4Q... LNG Doing Well, Permian ramping up... CVX have worked hard through the downturn to lower costs, cutting capex and opex by $11.6b and $2.5b respectively in 2016. Cash flow is rising as cash margins expand... Bottom Line: 4Q16 cash flow was somewhat of a sticker shock at $3.2b, below consensus and our estimates. At first glance it might be a stretch to see how CVX can reach cash flow neutrality in 2017, having to fund $23b of "cash capex" and dividends. However, as upstream margins improve, volumes ramp (4-9% in 2017 before disposals), one-offs move into the rear view, and as commodity prices recover, then cash flow should expand, while at the same time capex and opex continues to decline.
BofA/Merrill Lynch raised its rating on Chevron to Buy in December and recently raised its price objective from $130 to $145 a share. Analyst Doug Leggate said:
CVX is poised to accelerate a strategic shift to short cycle dev[elopment] that doubles current Permian prod[uction] targets within 5 yrs. After a decade of major project spending this improves capital flexibility vs super major peers. We recently raised our PO to $145 and suggest CVX as the best route to reweight energy portfolios amongst the oil majors.
Among other analysts, Independent Research rates Chevron a Buy and raised its price target from $130 to $131. Goldman Sachs also rates the stock a Buy, but cut its price target from $127 to $126 per share.
Credit Suisse's Westlake reiterated the firms Underperform rating on Exxon, but raised the price target from $75 to $78. Here are his comments on the company:
It continues to be a source of annoyance to investors that some US majors do not include a full cash flow statement in their release. The European Majors do so. Deferred taxes have been a drag on cash flow in 2016 across the group. XOM's 4Q16 cashflow was $7.4bn and this was depressed by $2.4bn of "working capital/other." This was likely deferred tax losses. We will only know when we get the 10-K. Even in the 10-Q at 3Q16, XOM lumped 19% of cash flow into "all other items" – disclosure should be more granular. Brent was $50/bbl in 4Q16. As XOM get the benefit of slightly higher commodity prices, then deferred taxes could become a neutral and then a positive. There is a tail wind from legacy project startups, and shale growth. However, it makes a big difference to XOM's oil price breakeven to annualize $7.4bn of 4Q cashflow ($29.6bn) or $9.8bn ($39.2bn) when the cash dividend is $12.5bn and headline 2017 capex is $22bn. On the reinvestment side of the ledger, the recently acquired shale assets could grow to 350,000 [barrels per day] over time. XOM produced 4.1 [million barrels per day] in 2016 with a 3% mitigated base decline. Hence, this shale growth could help offset 3 years of decline. Aside from shale, XOM also has lower cost resources to develop e.g. in Guyana, Papua New Guinea, Aspen solvent-assisted SAGD in-situ oilsands (subject to BAT), Romania, and has downstream.
Merrill Lynch's Doug Leggate offered this comment:
In our view 4Q16 results were operationally in-line with Street expectations and relatively light on new news. 2017 capex of $22bn looks in-line with previous guidance. Additional updates will need to wait for the March 1st Analyst Day. With limited upside from current levels we reiterate our Neutral rating and PO unchanged at $95.
S&P Global maintained its Hold rating and cut its 12-month price target from $92 to $87. The firma also noted:
We cut our '17 EPS estimate by $0.02 to $4.21, and initiate '18's at $4.81. Our 12-month target of $87, cut $5, reflects a 10X multiple of price to projected '17 operating cash flow, slightly above XOM's historical forward average. Q4 EPS of $0.89 before a $0.48 impairment charge, vs. $0.67, beating the Capital IQ consensus view by $0.19. Excluding the impairment charge, upstream segment earnings more than doubled vs. Q3, mainly on better realized prices and volumes. We see XOM's dividend payout ratio returning to manageable levels in '17 and see Permian Basin as a key catalyst.
