It’s becoming increasingly clear that global production cuts by the Organization of the Petroleum Exporting Countries have done little to alleviate the crude oil supply glut that collapsed oil prices back in 2014. With WTI crude oil prices once again down more than 15 percent so far in 2017, Wall Street is throwing in the towel on its bullish outlook for oil stocks.
RBC Capital Markets on Wednesday downgraded Exxon Mobil Corp. (XOM) from outperform to sector perform and Chevron Corp. (CVX) from sector perform to underperform. With oil prices once again below $50 per barrel, analyst Biraj Borkhataria says Exxon investors shouldn’t expect significant upside from the stock’s current level.
For Chevron, however, Borkhataria said the company’s exposure to the U.S. Permian Basin leaves the stock exposed to potential downside ahead.
“We believe Chevron’s ambitious ramp-up trajectory in the Permian could be a drag on group free cash flow and returns over the medium term, and we do not expect it to be a meaningful contributor to free cash flow until well after 2020,” Borkhataria writes. “We also see analyst cash flow estimates as too optimistic over 2017/18.”
The RBC downgrades come just one day after Bernstein analyst Bob Brackett downgraded oil and gas exploration and production stocks Devon Energy Corp. (DVN) and ConocoPhillips Co. (COP) from outperform to market perform.
Brackett said oil stock investors should no longer assume $50 oil in the near future.
“In an extended $48 WTI environment, only the lowest cost E&Ps will be able to grow at a robust rate within cash flow,” Brackett writes. “We advise E&P investors to focus their efforts on the few that can demonstrate robust growth at sub-$50 prices, since growth and returns are identical for firms that reinvest 100 percent of cash flow.”
While an oil market recovery may not have materialized as anticipated, Brackett says…
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