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Chevron & ExxonMobil: Time For Plan B?
Citigroup’s Alastair Syme and team worry that big-oil companies like Chevron (CVX), ExxonMobil (XOM), and ConocoPhillips (COP) might betting too much on a return to higher oil prices. They explain:
Until now the industry’s Plan A to restoring profitability has been to rely on a return to higher oil prices. The industry now looks to be adopting a variant – Plan A-star – which emphasises some capex cuts and cost-control but still with a fundamental view that higher oil prices will come to the rescue. We think investor’s interests will only be achieved if the industry commits to full self-help action – a Plan B – where the underlying principle is that oil prices may not recover any time soon…Within this context we think the equity market’s focus on Big Oil dividend yield as a valuation tool is an unhealthy obsession. The truth is that dividend cover for the group remains poor (the marginal income investor – the bond investor – we think continues to shy away due to the lack of security) and cutting capex will not pay dividends forever. Getting return-on-equity back above cost-of-equity is paramount. If spot oil prices persist then we think the group needs to push through a minimum of 20% cost-reduction in the E&P business to achieve this....MORE