Most oil and gas producers, including Exxon Mobil (XOM) and Chevron (CVX), posted record profits last year thanks to the rise in oil and gas prices, which largely reflected Western countries’ sanctions against Russia over its invasion of Ukraine.
Moreover, as oil prices have remained high, the shares of the two oil giants are hovering around their all-time highs. Since most of the easy money has been made from these two stocks, it’s only natural that most investors wonder which one is more attractive.
Let’s compare the two major oil companies.
Exxon Mobil is the second largest oil company in the world, with a recent market cap of $459 billion, behind only Saudi Aramco (ARMCO). The company is one of the most integrated, diversified oil producers in the world. In 2022, Exxon generated 67% of its total revenue from its upstream segment, while its downstream and chemical segments generated 27% and 6% of its total revenue, respectively.
Chevron is less diversified than Exxon. In 2019, 2021 and 2022, Chevron generated 78%, 84% and 79% of its revenue from its upstream segment, respectively. While most major oil companies produce crude oil and natural gas in roughly equal proportions, Chevron is more dependent on the price of oil, with a production ratio of 57/43. In addition, since the company prices some natural gas volumes based on the price of oil, nearly 75% of its production is priced based on the price of oil. As a result, Chevron is more dependent on the price of oil than Exxon.
Exxon and Chevron were hit hard by the Covid-19 pandemic in 2020 and suffered material losses that year as a result. However, thanks to the recovery of global oil consumption from the pandemic, the two oil companies bounced back in 2021. In fact, thanks to the sanctions imposed on Russia by the US and Europe due to the invasion of Ukraine, oil and gas prices rose to 13 years highlights last year. As a result, Exxon and Chevron achieved record earnings per share last year.
Since Chevron’s upstream segment generates a larger portion of its total revenues than Exxon’s upstream segment, one would expect Chevron to benefit more than Exxon from the rise in oil and gas prices. However, the sanctions have also greatly tightened the world market for refined products. As a result, refining margins skyrocketed to unprecedented levels and Exxon’s downstream segment posted exorbitant profits. Overall, both oil companies have benefited almost equally from the Ukrainian crisis.
The price of oil has moderated somewhat and the price of natural gas has recently plummeted, mainly due to an abnormally warm winter in the US and Europe. As a result, both companies are likely to post lower earnings this year. As oil prices have remained above average and refining margins have remained exceptionally high, both oil companies are also likely to post strong profits this year.
Exxon is the only major oil company that has failed to grow its production in the past 14 years. The company still produces about 4.0 million barrels of oil equivalent per day, the same as in 2008. This disappointing performance contrasts sharply with that of Chevron, which has consistently increased its production over the past five years.
Both companies rely heavily on the Permian Basin to fuel future growth. Aside from the Permian Basin, Chevron has growth projects in the Gulf of Mexico, while Exxon has one of the most exciting growth projects in the oil industry, in offshore Guyana. Over the past five years, Exxon has more than tripled its estimated reserves in the area, from 3.2 billion barrels to about 11.0 billion barrels.
In addition, Exxon came up with a promising growth plan for the next five years a few months ago. The company expects to spend $20 billion – $25 billion annually on capital expenditures and double its revenues by 2027 from 2019. Exxon expects to achieve such a great performance by investing most of its funds in areas of low cost vessels, namely the Permian Basin, Guyana and Brazil. Notably, Exxon will focus about 90% of its investments on reserves that are expected to generate annual returns of more than 10%, even with oil prices around $35. Overall, the oil giant will drastically upgrade its asset portfolio over the next few years and as a result will significantly improve its profitability at a given oil price level.
Exxon’s growth plan is undoubtedly exciting. However, the oil industry is so cyclical and unpredictable that investors should not take Exxon’s forecasts for granted. For perspective, Exxon released a similar seven-year growth plan in early 2018. Under that growth plan, the company expected to grow its production by 25%, from 4.0 million barrels per day in 2018 to 5.0 million barrels per day in 2025, mainly due to its investments in the promising regions of the Permian Basin and Guyana.
However, Exxon’s actual performance deviated significantly from plan. When the pandemic hit, the company drastically curtailed its investments to save funds and defend its generous dividend. In addition, the natural decline of the producing oil fields took its toll on production. As a result, Exxon’s output has fallen about 5% since 2018, a much worse result than the expected 25% increase. Nevertheless, the company’s recent growth plan is undoubtedly promising.
Chevron also has a promising growth plan. The company expects to invest between $13 and $15 billion a year in growth projects over the next five years. Thanks to these growth projects, Chevron expects to grow its production at an average annual rate of more than 3% over the next five years. In addition, since the company will invest in cheap barrels, it expects to significantly increase its earnings at a given oil price.
It’s also worth noting that Chevron has posted a 99% replacement rate over the last decade. This figure is much better than most oil companies, which have seen their reserves fall over the past decade.
The oil industry is highly cyclical, which is why it is extremely difficult for oil companies to grow their dividends for decades. Exxon and Chevron are the only two oil companies that belong to the best-of-breed group of Dividend Aristocrats. This group includes the companies that have increased their dividends for at least 25 consecutive years. Exxon and Chevron have raised their dividends for 40 and 36 consecutive years, respectively.
While both major oil companies are posting long-term dividend growth, income-oriented investors should be cautious, especially now that the oil industry is almost certainly past the peak of its cycle. As a result of the rally of Exxon and Chevron stocks nearing all-time highs, both stocks are currently offering low dividend yields for nearly eight years. Chevron offers a dividend yield of 3.7%, which is higher than Exxon’s 3.3% yield.
However, Chevron has already raised its dividend this year, while Exxon is expected to announce its next dividend increase later this year. Moreover, Chevron has a payout ratio of 40% while Exxon has a payout ratio of 35%. When Exxon raises its dividend, its yield and payout ratio will move closer to Chevron’s benchmarks. Overall, both stocks currently offer nearly equally attractive dividends.
It is also important to note that both oil giants have strengthened their balance sheets by taking advantage of their record free cash flows. Given their healthy payout ratios and their strong balance sheets, their dividends are safe for the foreseeable future. On the other hand, both stocks’ nearly eight-year low dividend yields likely indicate they are overvalued from a long-term perspective.
As long as oil prices and refining margins remain high, both Exxon and Chevron will continue to do well, with negligible differences in their performance.
Chevron benefits more than Exxon from high oil prices, but Exxon benefits more than Chevron from broad refining margins. That said, Chevron has a better record for manufacturing growth and proved to be more resilient to the pandemic than Exxon, which was about to cut its dividend in 2020.
Nevertheless, due to the high cyclicality of the oil industry, both stocks are likely to be overvalued from a long-term perspective at this point, with significant downside risk as oil prices enter the next downcycle.
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