SunTrust Likes Chevron, ConocoPhillips, Neutral On Exxon
SunTrust Robinson Humphrey analysts initiated coverage of the three major U.S.-based oil giants but suggested only two should be bought by investors.
The Analyst: Welles Fitzpatrick initiated coverage of the following three stocks:
Chevron Corporation (NYSE: CVX) at Buy with a $120 price target.
ConocoPhillips (NYSE: COP) at Buy with a $51 price target.
Exxon Mobil Corporation (NYSE: XOM) at Hold with a $41 price target.
Dividend Policy: The three majors are known for offering low risk and stable dividend and the recent oil downturn forced the companies to defend payouts, even at the expense of cutting capex, accumulating new debt or shedding assets, Fitzpatrick wrote in the initiation note.
The three companies offer investors a yield ranging from 4% to 8% versus a 20-year average of around 3% to 4%. The premium versus historical norms implies there are some concerns about the longer-term sustainability of dividends.
Among the three companies, Chevron's dividend is the "most sustainable" and ConocoPhillips has more upside if oil trades north of $70. Exxon can't organically cover its dividend obligations until 2022 or beyond unless there is a recovery in its refining business.
Cashflow: Oil and gas production accounts for around 90% of estimated 2022 cash flow for ConocoPhillips, followed by Chevron at 70% and 30% at Exxon. If product pricing moves up 10% and oil pricing stays flat, Exxon would have a free cash flow yield of 7% which allows it to cover capex and dividends organically. Chevron would still offer a better free cash flow yield at 11% and Exxon would look "more attractive" in this scenario.
2020 Outlook And beyond: All three companies will lower their production in 2020 before stabilizing in 2021, the analyst wrote. All three companies have "gone big" in unconventional production, especially in the Permian region.
Companies with large scale projects that only have the tail end of capex left boast a near-term advantage. Chevron can count on Tengizchevroil while Exxon can count on Guyana.
In fact, Guyana represents the majority of additional volumes for Exxon in 2022 and 2023 and Tengizchevroil should account for the majority of Chevron's 3% compounded annual growth through 2024. By contrast, ConocoPhillips offers less of a growth prospect but "we still recognize the longer-term value," the analyst wrote.
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