Integrated Oil
Ignoring the Cold Shoulder:
CVX Is Our Top Pick
Initiating coverage of the integrated oils industry
with an Attractive view. While we see downside risk to
the group into the near-term (shoulder season), we
recommend increasing exposure on weakness with a
longer-term (12+ month) bullish outlook driven primarily
by our proprietary supply and demand model (from Dr.
Sadad al-Husseini and our Commodities team).
Integrated oils attractively valued relative to historical
multiples and our returns expectations in 2010. The
group has lagged the S&P500 (13%), the EPX (13%),
and the OSX (30%), year-to-date. We see 2:1 risk
reward in the group with 20–45% price upside in the next
12 months vs. downside risk of 10-20% in the near-term.
CVX offers a more compelling story. We believe
CVX’s upstream growth, improved project execution,
growing oil leverage, and our expectations of improving
relative returns (ROCE) are being overwhelmed by
potential legal liability in Ecuador. Based upon our
valuation and legal analysis, we believe liability will be
far less than the >$15 Bn the market appears to be
pricing and represents a buying opportunity. In the
near-term, we believe underweight-rated MRO has
the most downside risk driven by refining and US
natural gas exposure, and financial leverage.
Crude will lead in both directions. We are revising
our crude estimates today: raising 2010 to $85 (above
the curve) and keeping the next two quarters below the
curve ($55 and $60). (See Hussein Allidina’s Near-Term
Dip to Precede Higher for Longer, July 13, 2009.) We
see near-term oversupply presenting a risk, and
longer-term undersupply providing upside support. In
the medium- and longer-terms, we prefer oil leverage,
as we think oil returns will exceed refining and US
natural gas returns for our companies into 2010.

Table of Contents
Integrated Oils: Risk-Reward Is Compelling ............................ 3
Our Top Pick – CVX, Overweight.......................................... 4
MRO, Underweight ......................................................................... 5
Our Stock Ratings.................................................................... 6
Company Debates.......................................................... 8
Sector Debate: Can Integrated Oils Outperform the Market?................ 9
Investment Thesis............................................................................... 13
Commodity Outlook: Bearish Short-Term, Bullish 2010............... 18
Refining: We Expect a Long Cycle with Low Returns through 2010 ................ 20
Natural Gas: Limited North American Natgas Exposure Is Best ............... 24
Corporate Action: Short Cycle Didn’t Provide Much of a Window .......... 26
Valuation Framework: Oil Exposure and Production Growth .................... 27
Overweights...................................................................... 31
Chevron Corp. (CVX, $61.40 Overweight, Price Target $89)..................... 32
Chevron: Production Growth Gaining Momentum ...................... 33
Underweights..................................................... 40
Marathon Oil Corp. (MRO, $28.33, Underweight, Price Target $34) .......... 41
Marathon: Upstream Transformation Gaining Steam, but Refining Still Drags ......... 42
Equal-weights ...................................................... 47
Murphy Oil Corp. (MUR, $51.01, Equal-weight, Price Target $72)................ 48
Murphy Oil: Still the Best Oil Leverage and Growth................................ 49
ExxonMobil Corp. (XOM, $65.12, Equal-weight, Price Target $85) ............... 54
ExxonMobil: The Benchmark..................................... 55
Hess Corp. (HES, $47.50, Equal-weight, Price Target $65)........... 60
Hess: Brazil Uncertainty a Major Overhang .......................... 61
ConocoPhillips (COP, $39.72, Equal-weight, Price Target $51) .......... 66
ConocoPhillips: Multiple Expansion Premature ................... 67
Appendix- Financial Statements......................... 72