Fundamentals For Chevron, Marathon Oil Haven't Been This Favorable Since 2012

Steadily rising oil prices coupled with increased operational efficiencies in the integrated oil sector may have created the best investment opportunity in the space since 2012. According to Jefferies analyst Jason Gammel, integrated oil companies have streamlined their operations so well that they are now able to generate profits with crude oil prices in the low $50s.

“By 2018, we expect the sector can generate about the same level of CFO ($250b) at $72/bbl Brent as it did in 2013, when Brent was $109/bbl,” Gammel explained.

He added that he expects free cash flow yield, the most important metric of all, to reach 7.4 by 2018.

Gammel projects cash flow from operations will grow 67 percent sector-wide in 2017 and another 44 percent in 2018. At this point, the sector can once again safely cover dividend payments using free cash flow.

A Few Positive Names

Jefferies has upped price targets for integrated oil stocks nearly across the board and has upgraded Eni SpA (ADR) E from Hold to Buy. Gammel believes Eni is one of the best plays on the growing momentum in the oil market.

In addition to Eni, Jefferies maintains Buy ratings on the Chevron Corporation CVX, Marathon Oil Corporation MRO and Royal Dutch Shell plc (ADR) RDS RDS.

Disclosure: The author is long RDS.B.