Chevron Corporation (CVX) Coverage Started with Outperform Rating, $120 PT

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The analyst believes Chevron Corporation is about to enter high-margin growth era

BMO Capital analyst Brendan Warn started coverage of Chevron Corporation (NYSE:CVX) with Outperform rating and $120 price target today, reflecting 17.36% upside potential over the stock’s last close. The analyst believes the company has arrived at an inflection point and is now going to witness high-margin growth and declining “pre-productive” capital.

The analyst explained that Chevron is able to report positive organic free cash flow to cover the cash dividend “at $50/bbl in 2017.” He also said that the company is highly-leveraged to a potential recovery in crude prices. He sees Chevron growing production at 4% CAGR through the 2015-2020 (expected) period. The analyst said that the company’s regional base asset investment is witnessing higher pace, and it is also prioritizing value over volume. This led him to suggest that brownfield and unconventional would be preferred.

Mr. Warn also says the company has what it takes to improve margins. He quoted his analysis and said that deep water projects and conventional LNG delivery would bring an improvement of up to $4/bbl by 2020 in cash margins. Chevron can also post unconventional growth in production for the short cycle, which could comprise as much as 25% of production by 2025, escalating the company’s flexibility in terms of capital, he added.

As per the analyst, the company could also raise capital flexibility with investment opportunities having shorter cycles, and this would help it improve its balance sheet. It can also lower employed pre-productive capital from 50% last year to 25% by 2018, expected, and “improve ROACE back to top-quartile performance,” he added

According to the data from FactSet, the consensus has 13 Buy, one Overweight, and 12 Hold ratings on Chevron shares. It also has a $111.39 mean 12-month price target on the stock, reflecting 8.94% upside potential over its last close.

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