EquityResearch19August2019FOCUSBarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.ThisresearchreporthasbeenpreparedinwholeorinpartbyequityresearchanalystsbasedoutsidetheUSwhoarenotregistered/qualifiedasresearchanalystswithFINRA.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE46.Restricted-InternalU.S.IntegratedOil&E&PInitiateCVX(OW)andXOM(EW);Quantifying‘Major’PermianMojoWeinitiateonCVXatOverweightwithpricetargetof$145andXOMatEqualWeightwithpricetargetof$73,primarilyduetoCVX’ssuperiorcurrentFCFprofile.WealsorenameourcoverageindustrytoU.S.IntegratedOil&E&P.CVXiswellpositionedtobothreturnsignificantFCFtoshareholdersandfundits3-4%five-yeargrowthCAGRguidance.Welikemanagement’sapproachtoits$4-$5bnrunratebuybackasbeingaratablereturnofcashthroughthecommoditycycle.WhileCVXhasoutperformedXOMby11%overthelastyear,thestockstilltradesatadiscountonanafter-taxCFbasisin2020,whichshouldinvertoverthenextyearasthemarketbecomescomfortablewiththesustainabilityofCVX’scashreturnprogram.WhilewethinkXOM’scounter-cyclicalinvestmentapproachwilleventuallypayoff,itleavesanear-termFCFdeficitafterdividendatBrentpriceslessthan$70(ex-assetsales).Quantifying‘Major’MojoViaStandalone,Bottoms-upPermianModelingThePermianisthelargestdriverofmedium-termproductiongrowthforXOMandCVXat~40%and~55%,respectively.Energycurrentlyisaonebig‘Show-meStory’andthePermianiscominguponFCFinflectionforbothnamesasXOMtargetsitsPermianasFCFpositivein2021at$60flatrealBrentwhileCVXtargets2020at$55WTI.DeterminingifXOMandCVX’sPermiangrowthandFCFtargetsareaggressiveorconservativeiscriticaltoassessingrisk.Thus,weleveragedourE&Pknowledgeandbuiltstandalone,bottomsupwell-by-wellPermianmodelsforanXOM/CVXdeep-dive.Theveilofsecrecy(i.e.muchimprovingbutsti...
