"Challenges" to cash flow growth at the San Ramon, Calif., oil explorer "[move] CVX to underperform," analyst Doug Leggate wrote.
“We recognize this is a counter-consensus view, but [the] debate on the share price starts with a discounted-cash-flow-based valuation that suggests the shares are fairly valued at current levels, assuming" a $60 Brent crude base, Leggate said in a report.
Leggate affirmed his price target on Chevron at $125 a share.
Unlike other plays in the energy sector, BofA expects Chevron’s primary growth driver, the Permian Basin, to dilute its previously sector-leading cash margins. That's because U.S. production is skewing toward gas and natural-gas liquids, the analyst said.
"Since oil prices collapsed" in 2015, "CVX has emphasized capital discipline, significantly lower spending vs. 2010-14 and pivoted towards share buybacks," the analyst said.
“We are concerned that share buybacks are symptomatic of underinvestment that limits visibility on pipeline of new projects to sustain growth in free cash flow and support sustained dividend growth,” Leggate wrote.
"[By] our analysis, visibility on [growth] looks challenged," he said.
Chevron shares are trading in the middle of their 52-week range. They hit a 52-week low above $110 in mid-January 2019 and three months later hit a 52-week high above $127. At last check they were off 2.3% at $117.82.
More broadly, Leggate wrote, energy is undervalued. "But lack of confidence on multiple levels still leaves energy as a ‘show me story’ in 2020," Leggate wrote.
"Add investor screens viewed increasingly through an [environmental-social-governance] lens, and a sector that is just 4% of the S&P raises questions on whether energy can compete vs the broader market."