Chevron Corporation Upgraded: 3 Things You Need to Know

2016 has been a real treat for Chevron (NYSE: CVX) stock owners -- while investors in other big oil players have been tricked. Now, that good news could get even better.

Over the past 52 weeks, shares of Chevron stock have grown a respectable 9% in value, even as investors in rival oil companies ConocoPhillips (NYSE: COP), BP plc (NYSE: BP), and even ExxonMobil (NYSE: XOM) endured nothing but losses. (That last one is kind of surprising given that currently, ExxonMobil is the only profitable company in the group.) And this morning, analysts at Goldman Sachs announced they are upgrading Chevron stock all the way from neutral to conviction buy.

Is Goldman Sachs just applauding Chevron's recent strong stock performance, or are there also reasons to believe more gains lie ahead? Here are three things you need to know.

Goldman Sachs sees Chevron stock pumping out more profits. Image source: Getty Images.

1. Pump up the volume

Chevron stock isn't currently profitable, but Goldman Sachs expects that to change soon, and for several reasons. As reported this morning in, Goldman's primary motivation for upgrading the shares is a belief that "after a decade of relatively flat production," Chevron is likely to show "strong volume improvement" in the amount of oil and natural gas it produces.

Goldman sees new liquefied natural gas projects in Africa and Australia as the primary catalyst for gains in volume, followed by fracking growth in the Permian shale in the U.S. Longer term, the analyst believes Chevron will keep the volume flowing with projects farther afield, such as from Kazakhstan's Tengiz oil field.

2. Translating volume into revenue -- and cash

Pumping more oil (and gas) is a good start. But for Chevron to profit from increased production, it also needs to see oil prices stabilize, and perhaps even grow a bit. Currently, WTI crude oil prices are hovering in the neighborhood of $50 a barrel. Forecasting the future for oil prices, Goldman Sachs argues that $50 prices can be depended upon, and that a price range of even $50 to $60 a barrel is likely.

At such prices, and with the production increases it also predicts, the analyst believes that Chevron will produce "robust free cash flow" in coming years. That would be a nice change, because according to data from S&P Global Market Intelligence, Chevron hasn't produced any free cash flow at all in more than three years. The company's last FCF-positive year was 2012 -- and it's running free cash flow negative again this year.

3. Mind the debt

Mind you, when I say that Chevron has been FCF-negative for three-and-a-half years running, that's defining "free cash flow" as cash from operations, minus capital expenditures, and not giving Chevron credit for cash generated from selling off its own assets. If you credit asset sales toward free cash flow, then Chevron actually did generate a tiny free cash flow profit in 2014.

I mention this because such asset sales are another important point in Goldman's buy thesis, inasmuch as the analyst argues Chevron could sell off $8 billion worth of its own assets through the end of next year. It's not clear whether Goldman is counting the proceeds of such hypothetical asset sales as part of its predicted "robust free cash flow" at the company. Whether it is or it isn't, one thing is certain: $8 billion in new cash raised from asset sales would go a long way toward paring down Chevron's $36 billion net debt load -- which as it stands, is a heavier debt burden than either BP or ConocoPhillips face, and nearly as big as Exxon's $40.1 billion debt burden.

Bonus thing: Bankers of a feather flock together

So that's Goldman's thesis in a nutshell: More production yielding more revenue and more cash -- which Chevron can deploy to pay its boffo 4.2% dividend, reduce its debt, and invest in further growth for the future. One final point here and I'll let you go:

Goldman Sachs' enthusiasm for Chevron stock is evident, but Goldman Sachs isn't the only analyst that's feeling really optimistic about Chevron these days -- nor even the first. In fact, BMO Capital announced it was rating Chevron stock an outperform back in September (predicting a $120 price target). And a month before that, Piper Jaffray's Simmons investment banking subsidiary rated the stock overweight and predicted Chevron shares would rise to hit $117.

That makes at least three big-name endorsements for Chevron stock in just three months. Should you believe them? Check out the analysts' records on Motley Fool CAPS, and decide for yourself.

You can review BMO Capital's track record here.

Piper Jaffray's performance is highlighted right here.

And as for today's featured analyst, Goldman Sachs, its record is recorded here.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 333 out of more than 75,000 rated members.

The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.