Here’s Why We Have Revised Chevron’s Price Estimate To $121 Per Share

Chevron (NYSE:CVX), one of the world’s largest integrated energy companies, has been on the rise since it posted a huge earnings surprise in its third quarter results backed by its consistent cost reduction efforts and notable recovery in commodity markets. The company’s stock has increased more than 17% over the last 45 days, primarily due to the company’s better-than-anticipated performance in the September quarter, coupled with the improvement in the commodity prices due to the Organization of Petroleum Exporting Countries’ (OPEC) decision to restrict their oil output. In line with the changing dynamics in the commodity markets, we have revised the price estimate for Chevron to $121 per share. Below we present some of the key reasons supporting the upward revision of the company’s valuation.

Gradual Recovery In Commodity Prices

With the OPEC finally deciding to put a cap on its cumulative oil production, crude oil prices are likely to rebound sharply over the next few quarters. While the exact trajectory of the recovery is unknown, the market expects an uphill climb for oil prices from here. Based on these recent developments, we have revised our forecast for oil and gas prices over the next few years. Accordingly, we have revised the estimate for Chevron’s average price realizations during the same period.

Strong Projected Production Growth

Despite the volatility in the commodity markets, Chevron has continued to target a sustained growth in its production over the remaining years of this decade. Given that the company’s robust portfolio of projects that are due to come onstream over the next couple of years, we expect the US-based company’s production to grow steadily between 2017 and 2020. This, along with the gradual recovery in commodity prices, could result in a notable upside for the company and its valuation.

Cost Reduction Measures Will Result In Higher EBITDA

Chevron has made significant progress in its efforts to control its operation costs. Year-to-date, the integrated company has managed to bring down its costs by 23% compared to the same period of 2015. Consequently, we expect the company’s profits to rebound to pre-2014 levels over the next couple of years. Improving profits will enable the company to regain its lost value and return higher value to its shareholders.

Restricted Capital Expenditure Will Augment Liquidity Over The Next Few Years

Finally, Chevron aims to restrict its capital spending over the next couple of years in order to preserve its deteriorating cash flows. The company expects to spend $25-$28 billion in capital expenditure in 2016, and $17-$22 billion in 2017 and 2018. Lower capital spending will allow the company to focus and invest its capital in high margin projects that will add upside to its stock in the long term.

Based on the aforementioned factors, we believe that Chevron is holding up well in the current commodity downturn and has a huge potential to outperform its peers, assuming that the commodity prices recover as anticipated.

Have more questions about Chevron (NYSE:CVX)? See the links below:

• Chevron’s Stock Surges As The Company Posts Better-Than-Expected 3Q’16 Earnings
• Chevron 3Q’16 Earnings To Be Higher Than The Last Quarter Owing To Improved Commodity Prices
• How Will Chevron’s Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
• How Will Chevron’s Revenue Move If Crude Oil Prices Average At $50 Per Barrel Until 2018?
• Is LNG The Next Big Thing For Oil And Gas Companies?
• Chevron’s 2Q’16 Earnings To Be Severely Hit Due To Persistently Low Commodity Prices
• What’s Chevron’s Revenue & Earnings Breakdown In Terms of Different Products?
• What’s Chevron’s Fundamental Value Based On Expected 2016 Results?
• What Has Led To More Than 30% Decline In Chevron’s Revenues & EBITDA In The Last Five Years?
• How Has Chevron’s Revenue Composition Changed In The Last Five Years?
• By What Percentage Can Chevron’s Revenues Grow Over the Next Five Years?
• Why Crude Oil & NGLs Operations are 3x As Valuable As Refined Products Operations For Chevron?

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