Citi has upgraded Chevron (CVX, Financial) to a "buy" rating and added it to its upside catalyst watchlist, highlighting its significant underperformance compared to its major competitor, ExxonMobil (XOM). Chevron's stock rose by 1.1%. By 2026-2027, Chevron's valuation discount relative to ExxonMobil could reach 20%, marking a historically large gap between the two companies' stocks.
Alastair Syme from Citi suggests that this valuation gap should prompt investors to form opinions around the uncertain outcome of the 2025 Hess (HES) arbitration. He believes that while the downside risks appear protected, the potential upside is substantial. Although the acquisition of Hess is seen as value-neutral, Syme argues it is crucial for Chevron's growth diversification.
Before the arbitration panel's expected mid-year decision, investors are unlikely to gain any clear insights. However, Syme emphasizes that the current value discount protects downside risks, offering significant upside potential in a win-win scenario.
Additionally, Syme views Chevron's exploration activities in Namibia as a potential upside catalyst for its stock price. He notes that while large oil companies typically don't leverage exploration for operations, Chevron's upcoming drilling in Namibia could be different. Chevron holds an 80% stake in the region, and success by other companies there suggests a net present value increase of $10 billion to $20 billion. This could balance any adverse outcomes from the Hess project. The first well is set to break ground soon, with results expected by early February.
