Chevron stock has 30% upside: Analyst

Investors looking for the upside that typically comes with aggressive, risk-oriented energy companies can find similar returns in the more defensive Chevron, according to Cowen and Co.

The oil major is Cowen analyst Sam Margolin's top pick for 2016, he told CNBC on Tuesday. The firm has a $122 target on shares of Chevron, a 34 percent premium to the current price at just above $91.

The average price target on the stock is $99.32, according to FactSet.

In addition to a healthy balance sheet with little debt relative to its spending plans, Chevron has a number of levers it can pull in the face of an oil rout that has slashed crude prices by roughly two-thirds in the last 18 months.

"We think it has a lot of upside as oil prices recover. They're pulling a lot of spending out of their profile, and at the same time they've got a lot of growth projects coming on this year that are going to contribute to volumes and growth," Margolin said in a "Squawk on the Street" interview.

Chevron announced earlier this month it would cut capital spending by 24 percent in 2016 to $26.6 billion. The company will not issue production forecasts until it reports earnings in January, but management previously said it expects output growth of 13 to 15 percent — about 2.9 million to 3 million barrels per day — by the end of 2017.

Margolin is bullish on the company's assets in the Permian Basin, a prolific and well-developed area in western Texas. A number of drillers have concentrated operations there as they seek to exploit their most productive assets in the face of a protracted oil price decline.

In a note, Margolin said Cowen believes the Permian position can provide short-cycle growth and offset 30 percent of Chevron's oil production declines, which are the result of lower capital spending.

"What's important for Chevron is as they lower spending and really slow their growth profile in 2017 and beyond, the Permian can kind of fill in the gaps," he told CNBC.

Maintaining production while reining in spending is the defining challenge for U.S. unconventional oil producers, who face high costs for extracting oil and gas relative to OPEC producers.

"It's easy to ramp production [in the Permian]," Margolin said. "It's not necessarily cheap. The operating costs aren't, say, competitive with OPEC, but certainly within the unconventional or shale landscape, the Permian is a place you can put money and continue to grow even at lower prices and even as your overall spending profile comes down, and that's really the key piece for that."

Chevron has a clear path toward cash flow neutrality beginning with its first shipments of liquefied natural gas from its Gorgon facility in Australia in the first part of 2016.

Factoring in the start of operations at Chevron's Wheatstone Project — Australia's first natural gas hub — Cowen sees the major's business in the country contributing $2 billion to $3 billion in free cash flow. That would help Chevron close a roughly $11 billion funding gap Cowen projects for Chevron this year.