RBC Capital Markets believes Chevron Corporation's (NYSE:CVX) ambitious ramp-up trajectory in the Permian could be a drag on group free cash flow and returns over the medium term, and it did not expects it to be a meaningful contributor to free cash flow until well after 2020. The firm also sees analyst cash flow estimates as too optimistic over 2017/18. Despite some attractive qualities, it assumes coverage with an Underperform rating.
Chevron has the most oil-weighted production base in the peer group, as well as a healthy balance sheet, strong cash margins and a solid downstream business. In addition, Chevron has an enviable undeveloped position in the Permian, which should provide optionality and volume growth over time. That said, looking forward RBC Capital Markets sees the potential for group returns to deteriorate relative to peers, and thus see Chevron’s premium rating relative to European peers at risk.
Chevron has highlighted its Permian assets as a key driver of future growth, with up to 700kboed production potential over the next decade. RBC Capital Markets' analysis suggests this asset will require substantial capex over the next few years to develop, and it did not see it as a significant contributor to free cash flow until well after 2020. Given Chevron’s huge position in the play (1.5m net acres), RBC Capital Markets believes the company could accelerate value creation from the asset via divestments or acreage swaps, while focusing on developing its core areas.
The firm's 2017/18 cash flow estimates are 9%/13% below consensus, respectively. Further, its scenario analysis at $40 and $50 over 2017-19 suggests Chevron has some of the most downside across the sector relative to current consensus estimates. Under a flat $50/bbl scenario, the firm expects Chevron to be reliant on asset sales for dividend coverage over the next couple of years.
Chevron is the highest-rated stock in RBC Capital Markets' coverage universe when looking at analyst ratings. RBC Capital Markets can see the attractions of the company, however it sees potential downside to estimates over 2017/18, and also expect the returns profile to deteriorate relative to European peers, which could put Chevron’s premium relative rating at risk. On the firm's numbers, Chevron trades at 9.7x 2018E EV/DACF vs. the Global average at 7.6x.