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Chevron Cut to Neutral at JPMorgan on Premium Valuation

Chevron's 'premium valuation fully reflects its disciplined capital allocation,' JPMorgan analyst Phil Gresh says.
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Oil titan Chevron  (CVX) - Get Chevron Corporation Report was downgraded at JPMorgan to neutral from overweight, with a price-target reduction to $111 from $128.

The San Ramon, Calif., company's "premium valuation fully reflects its disciplined capital allocation,” wrote JPMorgan analyst Phil Gresh.

“With the higher guided energy transition spending [for lower carbon emissions] … not having offsets elsewhere in the portfolio, we now see the company’s dividend coverage breakeven creeping closer to a Brent crude price of $55 per barrel, which is a bit above the group average.”

Further, “when combined with buybacks, we have the company’s total return of capital yield looking at/below the group average through 2025,” Gresh said.

“While the company could flex its balance sheet to return more capital to shareholders, we have leverage essentially in line with the group already, so we think that our assumed allocation looks fair.”

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To be sure, “strategically, we think that the steps that the company is taking around [energy transition] largely make sense, though the ability to measure the returns on incremental spending will be long dated,” Gresh said.

Chevron’s stock recently traded at $97.48, up 1.3%. It has slid 10% over the past three months amid valuation concern.

Morningstar analyst Alan Good puts fair value for Chevron at $115.

While other integrated oils are trading at bigger discounts, "valuation is not the only consideration when investing in the group,” he wrote last month.

“Incorporating asset quality, management discipline, financial health, and oil leverage, it’s hard to overlook Chevron.”