The world's largest energy company was downgraded at Goldman Sachs to Neutral from Buy and removed from the firm's Conviction Buy List. The analyst team with Goldman also lowered the price target on the shares to $93 from $98 even though Exxon beat analysts' estimates for the third quarter. XOM shares were down during the trading session Monday morning, at around $83.74.
The analysts noted that since upgrading Exxon Mobil in March 2015, it has been a "defensive winner." However, due to comments at the analyst day and conference calls, Goldman analyst Neil Mehta wrote in a research note Monday that there are limited catalysts to drive the shares higher as "XOM has been hesitant to pursue large-scale M&A, which may have provided greater investor confidence around reserve replacement/growth."
The firm forecasts that Exxon Mobil will see relatively range-bound production growth, between 4 million to 4.2 million barrels per day, through the end of the decade. But the production forecast in Nigeria remains one of the analysts' key uncertainties as "XOM has now lifted force majeure on the export stream."
As for the company's capital allocation, the Goldman analysts see Exxon reducing capital spending to an average of $21 billion in 2017 to 2020. Furthermore, they expect XOM's dividend to grow for the next several years, as long as Brent crude is above $50 a barrel.
There's also the issue of the Securities and Exchange Commission probe into Exxon's accounting practices, which has been an overhang on the stock recently. Jeff Woodbury, vice president of investors relations, stressed during the conference call on Friday that the company's practices follow regulations.
"We do not expect the debooking of reported reserves under the SEC definitions to affect operations of these assets, or to alter our outlook for future production volumes," said Woodbury.
That being said, the Goldman analyst team believe that Chevron (CVX) has more upside as it now replaces Exxon Mobil on the Conviction Buy List and was upgraded to Buy. The analysts see a "series of positive catalysts over the next 12 months" that should unlock value at Chevron:
- A strong volume improvement story after a decade of relatively flat production driven by the Australia/ Africa LNG projects, the Permian in the U.S. and the Tengiz in Kazakhstan.
- New projects ramp and oil prices improve to $50 to $60 a barrel for West Texas Intermediate, leading to robust free cash flow growth.
- Further relative multiple expansion vs. Exxon Mobil with ROCE (return on capital employed) improvement.
"Chevron offers a better 'rate of change' story, with the CVX better positioned to grow production, accelerate free cash flow and increase relative returns vs. XOM as new projects come online," Goldman's Mehta wrote.
Similarly, Barclays' analyst Paul Cheng believes mega-cap peers, such as Chevron and ConocoPhillips (COP) , are "gaining traction" following better third-quarter results. Cheng lowered the price target on XOM shares to $97, compared to his prior target of $100. The Barclays analyst now prefers ConocoPhillips and Suncor Energy (SU) over Exxon going forward.