Exxon (XOM) and Chevron (CVX) Have Further Upside to Q2 Consensus Earnings and FCF Estimates - Morgan Stanley

June 16, 2021 9:40 AM EDT
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Morgan Stanley analyst and strategist Devin McDermott sees a further upside to second-quarter consensus for earning and FCF for both Exxon (NYSE: XOM) and Chevron (NYSE: CVX). The former is reiterated as “top pick” given “outsized rate of change supporting the best dividend coverage in ~10 years and ~30% upside to consensus EPS in 2021/22.”

“In 1Q, CVX and XOM both delivered strong results, supported by a combination of cost & capex cuts alongside rising commodity prices. In fact, Big Oil collectively generated more FCFin 1Q than the past 6 quarters combined (see Discipline Pays Dividends). Heading into 2Q, we expect the trend of strong results to continue with rising commodity prices and capital discipline supporting our constructive call that earnings and FCF estimates need to move higher. With XOM set to release its 2Q earnings considerations in a little over two weeks, we provide a first cut of 2Q estimates for our Integrated Oil coverage,” the analyst said in a note.

For the second half of the year, consensus estimates need to move higher, McDermott adds.

“Assuming the latest commodity prices and margins we are ~30% above consensus earnings for XOM and ~17% above for CVX in 2021/22 on average. This results in organic FCF that is also ~30% above consensus for both XOM & CVX over the next two years. For XOM, which organically covered its dividend in 1Q for the first time since 4Q18, at strip prices dividend coverage averages ~200% in 2021/22 which should drive continued compression of its ~5.5% yield.”

The analyst prefers XOM to CVX on the back of the greater rate of change.

“At the start of the year, we upgraded XOM to Overweight (see Better Days Ahead), driven by 3 pillars: (1) strong execution on cost and capex cuts, with further reduction potential, (2) upside to consensus free cash flow estimates, and (3)yield compression underpinned by improving dividend coverage. While we believe CVX and XOM are both well positioned in the current macro environment, we continue to see a greater rate of change in free cash flow for XOM, in-part due to its larger exposure to chemicals. Improving downstream margins would be a larger incremental tailwind for XOM given its bigger refining footprint,” he concluded.

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