BMO Capital Markets believe Chevron Corporation (NYSE:CVX) is reaching an inflection point and entering a new era of higher-margin growth and increasing productive capital employed. BMO expects CVX to continue to benefit from being able to generate positive organic FCF, covering the cash dividend growth at >$50/bbl.
Chevron is continuing to benefit from the decrease of pre-productive C.E., moving from 50% in 2015 to 25% in 2018E, and improving its ROACE back to top-quartile performance. In 2017, the company is expected to achieve first production at Wheatstone LNG (64.14% W.I., operated); Hebron (29.6%, Exxon operated), Clair Ridge (19.42% W.I., BP operated); Jack/ St Malo Stage 2 (40.6-51%, operated) and Sonam (40%, operated).
Supported by higher expected capital commitments (~$2.5 billion in 2017), BMO forecasts Chevron's Permian production could deliver more than 300 kboepd by 2020E, contributing about 9-10% of group production. The Permian can deliver cash margins up to $38/boe (at $66/bbl WTI). Considering the asset is near royalty free, the quality of its Permian acreage is a fortunate legacy blessing and differentiates CVX from its peer group.
Chevron has confirmed a $19.8 billion capex budget in 2017, and $17-22 billion range guidance in 2018E. BMO continues to see production growing 11% YoY (16/17) and 3-4% CAGR (15-20) with increasing cash dividend growth supported by its peer-leading 7.9% organic FCF yield (2018E).
Supporting its cash dividend growth, BMO sees Chevron achieving a free cash flow generation sweet spot in 2017 and 2018 driven by the unwind of pre-productive capital and increasing focus on the short-cycle Permian. Chevron remains one of BMO Capital Markets preferred global majors exposure in 2017. BMO reiterates its Outperform rating and increases target price to $140 (from $120).