Chevron to rally 16%, says Piper Jaffray

Published Tue, Aug 9 201611:31 AM EDT

Investors should buy Chevron shares as a top pick in the energy space because of the company's ability to absorb oil losses and still pay a dividend, according to Piper Jaffray, which upgraded its rating on the oil giant to overweight from neutral. "We believe CVX is an attractive name at this point of the cycle ... we believe CVX offers impressive financial resilience and dividend sustainability alongside leading operational leverage to eventual oil price normalization and a seemingly more sustainable business model than peers," said Piper Jaffray's Guy Baber in a Monday note to clients. Baber raised Chevron's price target to $117 from $110, which represents near 16 percent upside from Monday's close. The firm trades at 12.3 times the price-to-earnings multiple of major oil companies, a 6 percent premium, according to the note. Chevron has rallied more than 13 percent since the beginning of this year. Chevron recorded $2.8 billion in impairment charges on its upstream exploration business in July, which set the firm back at a $1.5 billion profit loss. Investors should forgive this setback as Chevron's strength is in its healthy 4.3 percent cash dividend, which cushions the stock from downside, said the analyst. "We have a higher level of confidence (relative to closest peers) that CVX's spending plans are sufficient to grow the portfolio long-term, while still replacing reserves — critical for a company that's ultimate value lies primarily in its long-term progressive dividend," said Baber. The company has rigs in the Permian basin, which the analyst deemed the "most attractive short-cycle asset for any super," which will drive production growth until 2020, said the note. Chevron also has optimistic spending plans to add acreage in the Gulf of Mexico, Nigeria and Australia, even though the commodity price environment is tough right now, the note added. Oil prices are mired in a nearly two-year price rout, as crude prices tumbled . U.S. WTI and internationally traded Brent crude oil, which traded above $100 in 2014, dipped below $40 and $43 last week. The analyst forecasts that the San Ramon, California–based firm will have neutral cash flow, or an equal amount of money going in and coming out, at or below $50 per barrel, which is better than most of its oil rivals. "We have long documented our concern that capital spending for the super majors has fallen below sustainable levels (i.e. levels that can grow the company long-term and replace reserves). Overall, however, we are less concerned for CVX than for close peers," said the note. — CNBC's Michael Bloom and Tom DiChristopher contributed to this story.

A floorhand operates a Chevron oil drilling rig near Taft, California.

Chip Chipman | Bloomberg | Getty Images

"We believe CVX is an attractive name at this point of the cycle ... we believe CVX offers impressive financial resilience and dividend sustainability alongside leading operational leverage to eventual oil price normalization and a seemingly more sustainable business model than peers," said Piper Jaffray's Guy Baber in a Monday note to clients.

Baber raised Chevron's price target to $117 from $110, which represents near 16 percent upside from Monday's close. The firm trades at 12.3 times the price-to-earnings multiple of major oil companies, a 6 percent premium, according to the note. Chevron has rallied more than 13 percent since the beginning of this year.