North America United States
Industrials Integrated Oil
22 February 2009
Major Oils' Cash
Part 1: Cash Strategies:
Changing Ratings & PT
Paul Sankey
Research Analyst
(1) 212 250 6137
paul.sankey@db.com
Ryan Todd
Associate Analyst
(1) 212 250 8529
ryan.todd@db.com
Silvio Micheloto, CFA
Research Analyst
(1) 212 250 1653
silvio.micheloto@db.com
Change from under-weight to neutral integrated, neutral to u/w refining
In this note we analyse cash strategies of the Major Oils, (integrateds and E&Ps)
looking back at 2000-2008, and forward to 2009-2010. Graphically presented, we
highlight cash generation, costs, capex, break-evens, corporate actions
(acquisitions/ disposals/ debt paydown), & returns. Given we remain negative on
2009/2010 for oil, we are NOT players of the "beta trade" but with oil at a nearterm
low, and COP at its $40 PT, raise from SELL to HOLD. We favour defensive
quality: winners are Oxy, XTO (both BUY) and XOM. Raise XOM to BUY, $80 PT.
Deutsche Bank Securities Inc.
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factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
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LOCATED IN APPENDIX 1.
Industry Update
Top picks
ExxonMobil (XOM.N),USD71.23 Buy
XTO Energy (XTO.N),USD31.99 Buy
Occidental Petroleum (OXY.N),USD50.06 Buy
Upcoming events Date
ExxonMobil Analyst Meeting
NYSE 05 Mar 2009
Chevron Analyst Meeting
NY 10 Mar 2009
ConocoPhillips Analyst Meeting
NY 11 Mar 2009
DB Oil, Gas & Power Conference
Miami 27 May 2009
Global Markets Research Company
Buy quality in depressed markets until you are sure they are turning
N. B.: This report changes ratings for COP (to Hold from Sell) and XOM (to Buy
from Hold) and the PT for XOM (new: $80; old $70). For three years we have said
we would raise ExxonMobil to BUY when we went negative oil. In the event, we
went outright negative oil weeks before the election and political concerns held us
back. Since then, lower oil prices and a terrible economy have changed the
agenda, and we now recommend buying XOM with its CDS trading richer than the
US government, implying that the US government is more likely to go bust than
XOM (BP is similarly premium rated). We are unconcerned by XOM’s
outperformance, rather are attracted by its absolute valuation, which we find
equally to COP and CVX on a P/E basis for a company with over 10% cash
returned to shareholders (dividend + buyback 2009) and the third fastest per share
volume growth in the entire group, E&P included, in 2009 forecast. ConocoPhillips
screens less well, with a big jump in debt-to-cap, no buyback, lower yield and
volume growth and a higher oil price breakeven than average. However, it has hit
our $40 SELL-rated price target, and with oil refineries at maximum downtime in
March, we expect a recovery in crude prices into summer, to which COP is highly
leveraged. Raised to HOLD. The recovery in crude prices into a weak demand
environment and higher refining utilisation will negatively affect refining margins;
we are going to negative refining, and upgrading the integrateds group in its place.
This is a cross sectoral screening; part II will analyse CROCI
To us integrateds analysts, perhaps the most impressive performance in this cash
strategies note was XTO. Management has generated stunning annualised returns
looking back, but has also quickly changed strategy into 2009. We are concerned
about its worst-in-class debt to cap ratio, but see a relatively low dividend, lower
capex and strong hedges as more than offsetting this.
Valuation and risks – figure definitions are listed at the end of this note
If oil recovers rapidly on flattening demand and accelerating declines + OPEC cuts,
there is clearly a “slingshot” or “buy beta” trade which, we believe, will invalidate
our negative, quality-only stance. Best performer here could easily be SELL-rated
Suncor, which suffers from high oil price breakeven and severe cash pressure.
However we believe that credit/management quality will remain at a premium and
have set our recommendations accordingly. We value the oils top-down on longterm
ROCE/WACC to generate a target multiple applied to our through-the-cycle
EPS to derive our price targets and cross check them with a bottom-up net asset
value analysis. Oil price is the main overall risk, but we also note equities volatility
and accidents are major risks.

Table of Contents
Cash Strategies of Major Oils........................................................... 5
With cash returns under pressure, a spotlight on cash strategies ............................................5
Reserves Replacement/F&D............................................................. 8
Capex: Maintenance vs Growth ....................................................... 9
Oil Price Breakevens........................................................................ 11
Volume Growth ............................................................................... 12
Corporate Action ............................................................................. 14
Free Cashflow Generation .............................................................. 16
Issuance of Equity and Debt........................................................... 17
Dividend & Dividend Cover ............................................................ 19
Cash Returns to Shareholders........................................................ 22
Equity Returns ................................................................................. 24
What if we are wrong...................................................................... 28
Sensitivities to the outlook......................................................................................................28
Conclusions...................................................................................... 30
Valuation and Risks......................................................................... 33
How we see valuation ............................................................................................................33
Risks ......................................................................................................................................34
List of Definitions ............................................................................ 35