The rally in energy stocks has lifted ExxonMobil (XOM) and Chevron (CVX) almost equally during the past three months. Argus Research, however, is only downgrading one.
Reuters Argus analyst Michael Burke explains why he downgraded Chevron:
We are lowering our rating on Chevron Corp. to HOLD from BUY as the stock has approached our $130 price target. [Chevron] shares have performed well over the last three months, with a total return of 16%, compared to a 5% gain for the S&P 500. We believe that the stock is trading near fair value following this run-up and see few positive catalysts in the near term. Although Chevron has several promising new projects, we do not expect them to contribute meaningfully to production until 4Q14. We also note that the increased capital spending has led to higher debt and significantly lower free cash flow. In 1Q14, trailing 12-month free cash flow came in at negative $484 million, down from positive $2.9 billion a year earlier and well below the all-time high of $14.6 billion in 2011.
Burke is feeling a little more optimistic about ExxonMobil, however. He explains why:
We are maintaining our BUY rating on Exxon Mobil Corp. and boosting our target price to $114 from $104. Our higher target reflects our positive view of management's planned reduction in capital spending, which should boost free cash flow going forward. We also like the company's plan to increase profitability in the upstream segment by focusing on higher-margin production and by increasing the percentage of production from liquids from a current 52% to 69% by the end of 2017.
We note that Exxon's plan to curtail capital spending in the coming years contrasts with that of rival Chevron, which continues to spend heavily on new projects. As a result, Chevron has struggled to generate free cash flow over the last 12 months.
In our view, Exxon will remain the global energy leader, with superior returns on invested capital. We also believe that the company's exceptionally strong financial position, as indicated by its AAA credit ratings, will enable it to return excess cash to shareholders. In short, we believe that [ExxonMobil] will put capital to work in the most productive manner possible, and that it will return undeployed capital to investors through dividends and buybacks
Despite the differing opinions, shares of Exxon and Chevron have dropped almost equally today. Shares of Chevron have fallen 0.6% to $125.42 at 11:53 a.m., while ExxonMobil has dropped 0.5% to $102.56.
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