BMO Initiates Coverage Of Oil Majors, Picks Chevron Over Exxon Mobil

Crude oil prices recently hit six-year highs, and one analyst took the opportunity on Monday to initiate coverage of the two largest U.S. oil majors.

The Analyst: BMO Capital Markets analyst Phillip Jungwirth has initiated coverage of Chevron Corporation CVX with an Outperform rating and $123 target and Exxon Mobil Corporation (NYSE: XOM) with a Market Perform rating and $69 target.

Related Link: Oil Prices Pull Back From 6-Year Highs After OPEC Fails To Reach Production Deal

The Thesis: In the initiation notes, Jungwirth praised both companies for their dividends and recent momentum but said Chevron has the more attractive long-term cash flow growth profile.

“We like the company’s solid free cash flow profile and low dividend breakeven, which should improve in future years with the start-up of TCO FGP-WPMP (Kazakhstan) and a resumption of production growth from the Permian,” Jungwirth said.

He said Chevron is more levered to higher oil prices and is projecting free cash flow of $17.9 billion and $22.6 billion in 2021 and 2022, respectively. At the same time, he said Chevron’s cash flow has it well-positioned to grow its 5.1% dividend by 5% annually in the long term and resume $2.4 billion in annual buybacks starting in 2022.

Jungwirth said Exxon has also benefited from rising oil prices and has a market-leading upstream pipeline.

He said additional asset sales would further increase Exxon’s financial flexibility, and the company could also potentially cut its 2022 to 2025 capital spending plans of between $20 billion and $25 billion.

However, he said the stock is trading at a valuation premium to peers following its year-to-date outperformance and he would recommend investors wait for a pullback to buy the stock.

Benzinga’s Take: The global shift from fossil fuel to renewable energy will not occur overnight, and the world will continue to need energy in the meantime. There’s certainly plenty of money to be made investing in alternative energy in the long term, but analysts say there also will still be big profits in the oil and gas industry for at least another decade.

Photo: Chevron