Goldman Sachs Sees Outperformance Ahead For Chevron: Here's Why

Goldman Sachs has turned positive on Chevron Corp CVX again. 

What To Know: Goldman Sachs analyst Neil Mehta upgraded Chevron from Neutral to Buy and set a $187 price target, citing a cash flow inflection point that should set the company up for increased capital returns at a more attractive valuation.

Goldman Sachs was previously bullish on Chevron, but the analyst firm turned neutral in 2021 following the stock's outperformance from 2017 to 2020. Now that it appears execution risks have been mitigated, Goldman sees brighter days ahead for Chevron. 

"We highlight that from 2024-2026, we expect a sharp improvement in ROCE, production per share growth and FCF per share, all enabling a top decile return of capital profile in the S&P100," Mehta wrote in a new note to clients.

The Goldman analyst expects Chevron to add approximately $1.5 billion to earnings in 2026, driven by improving crude oil flows. When combined with continued capital returns, the stock looks increasingly attractive to the analyst.

From Last Week: Chevron Posts Mixed Q2 Performance On Lower Upstream Realization

Mehta noted that Chevron raised its annual buyback expectations by $5 billion at its investor day earlier this year. The company also pays a dividend around 3.8% and has a proven track record of growing its yield.

Although the analyst expects Chevron to generate negative net cash in 2024, he anticipates positive net cash in 2025 and 2026, which bodes well for shareholders. 

Chevron has underperformed the broader energy sector over the last year, but the Goldman analyst expects that to change in the years ahead. Mehta sees approximately 22% returns per year for Chevron versus about 10% returns for competitors in the space. Based on 2025 earnings and free cash flow estimates, Chevron is trading at a discount to peers, especially U.S.-based alternatives, he noted. 

"We value CVX on a 1/3 EV/DACF (implies $180/sh), 1/3 P/E (implies $195/sh), and 1/3 FCF Yield (implies $187/sh) components, with a 12-month $187 price target (implies ~18% upside to current share price levels)," the Goldman analyst said.

See Also: Oil Prices Hit $80, Sparking 5-Week Winning Streak: 5 Must-Watch Oil ETFs To Ride The Wave

CVX Price Action: Chevron shares were up 2.95% at $163.57 Monday morning, according to Benzinga Pro.

Photo: Tim Parkinson from Flickr.