Chevron raised to Buy at Citi as Hess arbitration uncertainty looks discounted

Chevron (NYSE:CVX) +1.1% in Tuesday’s trading as Citi upgrades shares to Buy and places the stock on an upside catalyst watch, pointing to its significant underperformance compared with key peer Exxon Mobil (XOM).

Chevron’s (CVX) valuation discount to Exxon (XOM) could reach 20% by 2026-27, a historically wide gap between the two stocks, which Citi’s Alastair Syme says should “position investors to take a view around the unknown outcome of the Hess arbitration in 2025,” adding “the downside looks protected, the upside is significant.”

Syme sees the Hess deal as value-neutral, but believes it is important to Chevron (CVX) in terms of offering growth diversification, Syme says, but it is impossible for investors to gain any real clarity ahead of the expected mid-year ruling from an arbitration panel, “but we argue that the value discount now protects the downside, positioning investors for significant upside in a win scenario.”

Exploration in Namibia prompts Syme to consider as a potential upside catalyst for Chevron (CVX) shares; “Major oil companies do not usually offer much operational leverage to exploration, but Chevron’s upcoming Namibia drilling could be different,” Syme writes.

Chevron (CVX) owns an 80% stake in the area of Namibia where others have found success, which could mean $10B-$20B of net present value for the company, and could provide a counterbalance if the Hess outcome is unfavorable, Syme says; the first well spuds in two weeks, with a result likely by early February.