Did Chevron Deserve an Upgrade?

Despite adding $15 billion to the cost of the Gorgon liquefied natural gas project in Australia and facing a slump in energy output, researchers at Dahlman Rose & Co. have upgraded Chevron Corporation (NYSE:CVX) from “Hold” to “Buy” with a price target of $120 per share.

Where’s the Upside Coming From?

A price target of $120 per share represents a 14.1 percent upside on Wednesday’s closing price, and is $1.47 over the stock’s 52-week high of $118.53.

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On Wednesday, Chevron released a statement indicating that the total cost estimate for the Gorgon project, a massive LNG foundation on Barrow Island, has increased from about $37 billion to $52 billion. “The factors contributing to the increased costs and schedule impacts include labor costs and productivity associated with Barrow Island site infrastructure, logistics challenges and weather delays,” Chevron reports in the statement.

Additionally, the strength of the Australian dollar, which is currently trading at AU$0.95 to one U.S. dollar, has impacted the cost of the project. Regardless, Chevron remains positive about Gorgon’s outlook…

“Gorgon project economics are attractive,” said Chevron vice chairman George Kirkland. “While investment requirements have grown, oil prices, which directly impact the overall revenue stream, have increased by approximately 80 percent over the same time period. In addition, the LNG nameplate capacity has increased by 4 percent to 15.6 million tons per year.”

Consensus seems to be that the cost increase is unfortunate but does not inhibit Chevron’s ability to outperform in the near future.

CHEAT SHEET Analysis: Sail Away on Natural Gas Investments

One of the core components of our CHEAT SHEET investing framework explains that companies riding macro trends tend to outperform those that don’t. Think of the investing proverb, “A rising tide raising all boats.” In this case, Chevron’s boat is buoyed by a sea of liquefied natural gas.

Australia is poised to become a major staging ground for LNG exports to markets in Asia like China and India. Chevron’s Gorgon project, despite its increased cost, is expected to create a flood of revenue for the company and its partners in the project, Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB), each with a 25 percent stake.

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