Why ExxonMobil Needs $85 Oil
Oppenheimer analysts Fadel Gheit and Luis Amadeo explain why ExxonMobil (XOM) needs $85 oil:
Deutsche Bank’s Ryan Todd and team don’t think Exxon’s cash-flow issues–or Chevron’s (CVX), for that matter–are as bad as investors think:
Without question, one of the key concerns at Chevron and ExxonMobil is the issue of future capital spend vs. cash flow, and by extension, the question of portfolio profitability at lower oil prices and sustainability of the business model. While the concern is not entirely unjustified, and global IOC portfolios will certainly see costs adjust more slowly than the US onshore, we view the fears as somewhat overstated. This is largely a result of lower than expected forward capital budgets, in our view, as the significant roll-off in project spend and US onshore flexibility will drive significant medium-term capex deflation, with limited near-term portfolio impact. At Chevron, where investor concerns are particularly acute, we view the roll-off in LNG spend as underappreciated, with global LNG spend set to fall from $8.5Bn in 2015 to under $1.0Bn in 2017. Some of this should clearly be recycled into other projects/US unconventional, but we see Chevron capex falling from $35Bn in 2015 to the low $30Bn range by 2017, with a target of covering capex/dividend by 2017 at a “reasonable” oil price (think $70/bbl+). Likewise, at ExxonMobil, we see forward capex as 15%-20% lower than recent run rates. In such a scenario, budgets are close to balanced at both in 2017 at $75/bbl Brent, with Chevron actually generating a higher FCF yield at both the current strip and our commodity deck by 2018, with Chevron offering FCF (post div)/FCF (ex div) yield of $1.7Bn/5.7% vs ExxonMobil’s $1.3Bn/4.1% using our deck (2018: WTI/Brent/HH of $80/$85/$5).
- Published on:
- March 4, 2015
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