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Chevron's Still Our Favorite Integrated Oil Major

It's set to deliver peer-leading growth while keeping the dividend safe.

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Nothing in  Chevron's (CVX) annual analyst day altered our thesis on the company, leaving it as our preferred pick among the major integrated oil companies. Our narrow moat rating is intact, while our fair value estimate has increased to $111 per share from $102, largely because of updated guidance. Chevron still holds the greatest production growth potential of the group; combined with rising cash flow and falling spending, this keeps the dividend safe while allowing for growth. The company trades at one of the widest discounts to our fair value estimate and holds peer-leading leverage to oil prices, creating the greatest upside potential.

Following similar reductions from ExxonMobil (XOM), Chevron cut capital spending guidance for 2017 and 2018 to $17 billion-$22 billion from the $20 billion-$24 billion guidance given earlier this year during the fourth-quarter earnings announcement. Guidance of $26.6 billion for 2016 is unchanged but could ultimately be lower as management continues to seek out reduction opportunities while oil prices remain low. While requiring additional debt this year to fund capital expenditures and cover the dividend, Chevron anticipates being cash flow break-even at around $50 a barrel in 2017 on a combination of higher production, reduced capital spending, lower operating expense, and asset sales. We anticipate that break-even levels could fall further in 2018, depending on capital spending, as higher production and improved margins lift cash flow, keeping the dividend safe. The increases in production, earnings, and cash flow should also allow for increases in the dividend.

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Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.