Further Upside For Chevron Is Unjustified, BMO Analyst Says

With Chevron Corporation (NYSE: CVX)'s stock trading in line with BMO Capital Market's price target, the research firm downgraded shares of the company.

A widening valuation multiple isn't justifiable, despite Chevron's promising growth prospects in the Permian and a ramp of Australian LNG volume supporting the dividend and the potential for share buybacks, analyst Brendarn Warn said in a Wednesday note. 

BMO downgraded shares of Chevron from Outperform to Market Perform, with a $120 price target.

At the time of writing, shares of Chevron were sliding 1.20 percent to $118.78.

The energy company's multiple expansion over the last 18 months was anticipated, given BMO's view that 2017 was going to be an inflection year for Chevron, Warn said. (See Warn's track record here.) Chevron is shifting the amount of its employed pre-productive capital from about 50 percent in 2015 to less than 25 percent in 2018, with Gorgon, Wheatstone LNG and other projects kicking off in 2017.

The natural gas projects are major cash cows, generating revenues of more than $4 billion, covering half of the company's $8 billion cash dividend, Warn said. 

"Overall cash margins will achieve strong accretion and capex declines as high capex-intensive projects are being delivered." 

Chevron's Permian positioning has proved to be ideal, according to BMO. The firm sees the Permian as not only a large, high-margin and low royalty acreage position in the world's most sought-after unconventional basin, but also as one that allows Chevron to derisk its capital investment program from long cycle projects to a more flexible spend profile.

"Given our flat price forecast, $55/bbl Brent until 2020, we do not anticipate any material upside for the shares, which already trade at a premium to their peers," Warn said. 

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