Chevron Upgraded to Outperform

With the economic rebound showing signs of strengthening and oil prices rallying, we expect integrated oil companies such as Chevron Corporation (CVX) to continue to accelerate revenue and earnings growth over the next few quarters.

Apart from the economic recovery, Chevron’s recent results have also benefited from its operational and production efficiency and contributions from large, multiyear growth programs.

In the recently reported first quarter results, Chevron reported a jump in its first-quarter 2011 profits, benefiting from higher oil prices and stronger refining margins. Earnings per share (excluding adjustments for foreign-currency effects) came in at $3.17, above the Zacks Consensus Estimate of $2.99 and the year-ago adjusted profit of $2.37. Quarterly revenue rose 25.2% year-over-year (from $48,179.0 million to $60,341.0 million) and was 10.9% above our projection.

The second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) has been able to boost returns and remain competitive by embarking on aggressive cost reduction initiatives, exiting unprofitable markets and streamlining the organization. We believe that the company offers meaningful long-term upside potential for investors and therefore upgrade Chevron shares to Outperform from Neutral.

The San Ramon, California-based firm boasts of an impressive business model, with a greater focus on crude oil compared to natural gas, and upstream versus downstream. Chevron also possesses one of the healthiest balance sheets in the industry, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions. The resumption of the buyback program not only highlights the company’s commitment to create value for shareholders but also underlines the oil giant’s confidence in commodity prices.

As such, we believe Chevron is well positioned going forward and view it as an attractive investment. Our long-term Outperform recommendation is supported by a Zacks #2 Rank (short-term Buy rating).

EXXON MOBIL CRP (XOM): Free Stock Analysis Report

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