Better Buy: ExxonMobil vs. Chevron
Oil prices were beginning to firm at the end of 2020. Yet the two ExxonMobil (NYSE:XOM) and Chevron (NYSE: CVX) were likely happy to see the year come to an end – the improvement in oil prices started from a very low base given the pandemic headwinds the energy sector has faced.
Investors watching these US energy giants today might wonder which one is best positioned to take advantage of a rally. Here’s what you need to know.
In the headlines
While the price of oil and natural gas is clearly the most important determinant of Exxon and Chevron’s top line and bottom line performance, there is another issue that is increasingly occupying the front and center: The global push to cut carbon emissions is causing very public policy and management issues, at least for Exxon.
The company has faced a lawsuit in New York claiming it defrauded investors by hiding the costs of climate change. He finally won that case at the end of 2019, but the issues are unresolved – he is currently under investigation by the SEC, which is examining how he values his assets. This is an issue that has bothered the company for some time, as historically it has not written down asset values as aggressively as its peers. At the same time, dissenting shareholders are trying to get the company to change the way it operates more aggressively. Basically, because of its prominence in the energy industry, Exxon has a target on its back.
Chevron isn’t immune to those same threats, but it doesn’t attract the same level of attention either. Global risk is likely to be an increasingly important issue for these oil giants because, unlike their European counterparts, Exxon and Chevron have not made spectacular plans for a cleaner future. But it looks like Exxon is going to take the most heat.
This is partly due to the size and importance of Exxon in the sector – it has a market capitalization of around $200 billion, making it one of the largest energy companies on Earth, and has a long and storied history dating back to the 1800s and the legendary Standard Oil Company. But Chevron is no newcomer to the industry, weighing in with a market capitalization of around $180 billion. Like Exxon, it has a diversified business spanning from the upstream (exploration and production) to the downstream (chemicals and refining) segments of the industry, and a global footprint. In other words, it can compete with Exxon as a business.
This includes the dividend front, where Exxon’s 37-year streak of annual increases is better, but Chevron’s 33-year streak is very close. Meanwhile, both oil giants stress the importance of sustaining their dividends, even if times are tough today.
Overall, when you look at size, diversification, and dividend history, there isn’t much difference between these two companies. That said, Exxon’s 7.2% dividend yield is much more generous than Chevron’s current 5.6%.
A big problem
This raises another notable issue for Exxon, however, and explains why more conservative investors are likely to prefer Chevron: capital expenditure. Before the pandemic slowed, Exxon was embarking on a massive capital investment program to reverse the production declines it was suffering from. It wasn’t really an optional effort – the company had to make significant investments in production if it was to maintain or grow its business. It was expected to be costly and to put significant pressure on the company’s ability to continue to increase its dividend. And then the coronavirus shook things up and pushed oil and natural gas prices to painful levels.
Like just about every company in the energy sector, Exxon has cut spending. But the need to spend hasn’t gone away – the cost is simply pushed into the future. Meanwhile, production becomes an even bigger concern in the short term. Chevron entered the recession in better shape, as it benefited from previous spending. His need to spend now is not as great. This difference appears especially in the balance sheets of the two companies.
At the start of 2019, Chevron’s debt ratio was higher than that of Exxon. By the third quarter of 2020, however, Exxon’s debt ratio had doubled, while Chevron’s had increased by a modest 20% or so. To be fair, Exxon’s ratio is still a reasonable 0.4x, but Chevron’s finances are in much better shape given its debt-to-equity ratio of around 0.25x. That suggests Chevron will have an easier time weathering the current industry malaise and maintaining its dividend. He even signed a major acquisition, which will probably increase the debt ratio, but for good reason: the deal will strengthen his position in the industry. In fact, on Chevron’s third quarter 2020 earnings conference call, management noted that its breakeven point was below $50 a barrel, suggesting that investors don’t need to worry as much about its dividend, because that’s pretty much where the oil is today. Exxon is simply not in such a good position.
The best choice
Exxon is a well-run energy company and investors wouldn’t make a bad decision buying it. There is significant upside potential in the stock, assuming oil prices mount a sustained recovery. However, at the moment, that feels like a big “if,” and the headwinds the company is facing are likely to continue for some time. More conservative dividend investors would probably be better off taking advantage of the lower yield offered by Chevron, which seems better positioned to weather the current headwinds.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.