The U.S. oil industry has stabilized in recent months as prolonged OPEC production cuts and increasing crude oil demand has kept oil prices above $60 per barrel. Nevertheless, Chevron Corp. (NYSE: CVX) stock has failed to gain much traction in the market, but some Wall Street analysts believe that will soon change.
Chevron stock has gained just 2.3 percent over the past six months, but Bank of America analyst Doug Leggate says Chevron’s cash generation and capital return program provide long-term investors with a unique opportunity.
Chevron recently provided a three-year outlook update at its investor day event, and Leggate liked what the company had to say.
“CVX outlined its three-year plan where the focus is on exploiting the portfolio advantage of flexible growth, on a capital-efficient base, stabilized by completion of a number of recent major projects and a return to competitive dividend growth,” Leggate says.
[See: 7 Energy Stocks with High-Powered Dividends.]
Chevron’s 3.9 percent dividend yield has been a silver lining for investors disappointed with the stock’s recent underperformance, and Leggate says the company should be able to raise its dividend by 20 percent. In addition, Leggate says Chevron could easily repurchase at least 15 percent of its outstanding shares over the next three years, which would effectively increase the company’s dividend payout per share.
“CVX’s 2018 strategy update delivered on all of the key issues we view as necessary to underpin market confidence in an investment case moving to harvest cash flow and in 2018 morphs to a free cash story balanced at $50 oil,” Leggate says.
Morningstar analyst Allen Good says Chevron has also outperformed major oil peers in terms of margins and returns on capital in recent years and could lead the pack in production growth in the next several years.
But Good says that growth has come at a high price as Chevron has spent more on a per-barrel basis than other big oil companies. He says those heavy investments will likely continue to weigh on earnings.
“That said, we expect cash flow to rise during the next five years thanks to improving oil prices, cost-cutting, and increased production,” Good says.
[See: 7 Energy ETFs to Watch in 2018.]
Bank of America has a “buy” rating and $138 price target for Chevron. Morningstar has a “fairly valued” rating and $121 fair value estimate for CVX stock.
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Chevron Primed for Dividend Hike originally appeared on usnews.com
