BofA Upgrades Occidental, Downgrades Chevron

BofA Securities considers oil stocks as "equities first, oil companies second." Weighing them on the basis of market, company-specific and commodity risks bodes well for some stocks, but not all.

“We reset [price objectives] higher across the board for a second time since the COVID crisis disrupted oil and equity markets; but strong share performance has left limited upside for some while for others, the risk profile is reset,” the research firm said Tuesday. 

The Analyst: Doug Leggate upgraded Occidental Petroleum Corporation OXY to Buy and raised the price target from $18 to $32.

Leggate downgraded Chevron Corporation CVX from Buy to Neutral and raised the target from $97 to $110.

The Occidental Thesis: Occidental has one of the highest risk profiles of the sector. However, the environment is working in its favor, Leggate said. (See his track record here.)

“Occidental is reset by the rapid recovery in oil prices at the front of the curve, and positioning the outlook for a return to free cash over the balance of 2020 and 2021 at strip prices,” the analyst said. 

The company’s free cash flow, “disposal opportunities,” capex and overhead reductions, board motivation and personnel changes are seen to justify further share price recovery, despite near-term volatility, he said. 

“We believe OXY now has line of sight to generate sufficient free cash as to comfortably navigate debt maturities that has been perceived as the biggest challenge facing the investment case.”

BofA forecast $7 billion in free cash flow from Occidental between 2020 and 2021. 

The Chevron Thesis: BofA values Chevron’s superior balance sheet and transparency on its capital needs.

“But with that transparency comes limits to our view of fair value, defined by discounted cash flow and with the estimated cost of capital full reset to pre-COVID levels,” Leggate said. 

“...Thus while we saw CVX as one of the expressions of an oversold energy sector at the peak of the market stress, the rebound has similarly moved the shares back to levels we see as fairly valued, albeit still a low risk play on a long-term oil recovery.”

CVX, OXY Price Action: At the time of publication, Chevron shares were down 2.87% at $100.30, while Occidental shares were down 6.19% at $22.89. 

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