U.S. Integrated Oils
2009 Outlook Hinges on Oil Price, Cash Management;
Upgrading CVX to OW and Downgrading MRO to N;
Adj Ests
US Integrated Oils
Michael LaMotteAC
(1-214) 965-3623
michael.lamotte@jpmorgan.com
Katherine Lucas Minyard, CFA
(1-212) 622-6451
katherine.a.lucas@jpmorgan.com
Nandu Patel
(1-214) 965-3614
nandu.x.patel@jpmchase.com
J.P. Morgan Securities Inc.
See page 19 for analyst certification and important disclosures.
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As oil prices are expected to remain weak through 1H09 on global economic
weakness, lagging OPEC compliance, and inventory builds, we believe trading in
integrateds to be choppy over much of the first half in a range that today appears
to be fairly balanced (with a risk-reward of +/-15%). However, as markets begin
to discount oil market tightening in 2010 (and the coincident improvements in
integrateds returns), we would expect the trading range to take on an upward slope
in 2H09 and further into next year. Cyclically speaking, we think this is a good
time to be buying integrateds and therefore reiterate our positive view on the
group; however, we caution against chasing momentum and urge investors to be
disciplined about entry points with respect to both stock selection and price levels.
• Cyclically, returns (and stocks) should trough this year. On our new
estimates (based on the J.P. Morgan Commodities Team’s new WTI forecast of
$43/bbl), sector average ROIC should drop to 9% this year—a level consistent
with both the ‘99 and ‘02 troughs. However, a return to mid-cycle returns by ‘11
implies 40%+ upside over the next two years—targets that seem reasonable to
us given current conservative crude assumptions ($75/bbl in ‘11) and what may
be substantive declines in services costs over the next two years. Consequently,
we conclude that 1H09—cyclically speaking—will present attractive entry
points.
• Capex diets and CF management outweigh cuts to 2009 earnings. Although
we have lowered our ‘09E EPS by 50% and expect a ~70% drop from ‘08E, we
believe the integrateds will preserve dividends and reduce capex 15-20% (some
of which will come through lower material and services costs) to conserve cash.
• Upgrading CVX to Overweight; downgrading MRO to Neutral. We have
revised our ratings and CVX and MRO, seeing better relative value in CVX
based on our year-end 2009 price targets, especially after MRO’s impressive
recent run. We believe CVX’s higher returns, stronger balance sheet, lower
capital intensity, lower downstream exposure, and propensity for more positive
news flow in 2009 position it to outperform the peer group, whereas MRO’s
higher capital intensity, downstream exposure, and potential need for additional
funding this year reduce the potential upside relative to the peer group.

Downward Revisions to Oil Price Outlook
Our J.P. Morgan commodity research team has adopted a more conservative stance
on our near-term crude oil price outlook, recently lowering estimates from $69/bbl to
$43/bbl for 2009, and from $85/bbl to $65/bbl for 2010, on average. Our U.S.
natural gas price assumption has fallen from $7.4/mcf to $6/mcf for 2009 and from
$7/mcf to $6.5/mcf for 2010. We have also adjusted our refining margins and crude
quality differentials, based on both our outlook for continued weakness in product
demand and our commodity price forecast.