In fact, Chevron’s market cap briefly exceeded Exxon’s in October after starting the year at a considerable disadvantage. Exxon (ticker: XOM) is down 38% this year, while Chevron (CVX) is down 25%.
Now one analyst thinks it’s time to switch bets. Wells Fargo’s Roger Read upgraded Exxon to Overweight on Tuesday while downgrading Chevron to Equal Weight.
“This is not a criticism of Chevron, but mostly a change in our view that in 2021, the last might be first for a while,” he wrote.
Exxon has cut operating costs and should see margins in its refining and chemicals businesses revert to historical levels, Read predicts. Those changes should allow Exxon to improve its performance even if oil prices stay low. The company won’t suddenly see the kinds of returns that Exxon generated in its heyday, but the market tends to reward improvement, and Read thinks investors will see evidence of that.
“We do not expect production growth and only minimal free cash-flow generation, which is inclusive of disposition proceeds,” Read wrote. “However, this represents a significant change from the last several years of significant cash burns and increased leverage.”
For most investors, the big question is whether Exxon can continue to pay its dividend at current levels or whether it will be forced to cut it next year. The company has said it does not plan to add more debt, so it will need operations to improve to cover the payout. Read is confident that Exxon will make enough to dispel those worries.
“In our view, this is likely enough to lift the shares a bit higher and lessen worries about dividend sustainability,” he wrote.
Read’s price target for Exxon is $53. The stock was trading at $43.12 on Tuesday, up 2.2%.
Read’s optimism comes as Exxon faces new challenges, including pressure from activist investors to improve its plans to curb carbon emissions and boost returns. One analyst even suggested earlier this year that Chevron and Exxon should merge—and call the combined company Chevron.
Write to Avi Salzman at email@example.com