The energy sector has outperformed the S&P 500 Index by an impressive margin this year thanks to the rally of oil and gas prices to multi-year highs. While the S&P 500 Index has shed about 20% this year, the Energy Select Sector SPDR ETF (XLE) has rallied 23% as of this writing. As a result, investors are flocking to energy companies Exxon Mobil (XOM) and Chevron (CVX). In this article, we will compare the two oil giants, XOM vs. CVX, in several aspects.
Exxon Mobil (XOM) and Chevron (CVX) are the only two oil producers that are Dividend Aristocrats. Therefore they are among the most popular oil companies in the income-oriented and dividend growth investing communities.
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Since the onset of the coronavirus crisis, the shift from fossil fuels to clean energy sources has accelerated. Consequently, oil producers have drastically reduced their investments in growth projects, and the oil market has become exceptionally tight.
The situation has become much worse due to Western countries’ sanctions on Russia for its invasion of Ukraine. Russia produces approximately 10% of global oil output and nearly one-third of the natural gas consumed in Europe. As a result, Western countries’ sanctions have tightened the oil and gas markets. As a result, oil and gas prices have rallied to nearly 13-year highs this year. This change is an ideal business environment for all the oil majors, including Exxon and Chevron.
Exxon is well-known for its more integrated and diversified business model than Chevron. Last year, Exxon generated 62% of its earnings from its Upstream division and generated the remaining 38% of its earnings from the Downstream and Chemical divisions. These two divisions have always supported Exxon’s profits during the downcycles of the energy sector. Still, they somewhat reduce the upside potential of the oil major during boom times.
Nevertheless, as the Ukrainian crisis has dramatically tightened the supply of refined products, refining margins have skyrocketed to all-time highs. As a result, Exxon is reaping the full upside from the ongoing crisis.
Chevron has a much less diversified business model, generating approximately 80% of its earnings from its upstream segment. As a result, it is more leveraged than Exxon to the rally oil and gas prices during regular cycles. However, as the downstream segments are thriving too in the current boom, Exxon and Chevron are both thriving to the same extent. To be sure, both oil majors are expected to grow their earnings per share by approximately 120% this year to new all-time highs.
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Exxon is the only oil major failing to increase its production over the last 14 years. This disappointing performance is in sharp contrast to that of other oil majors, such as Chevron, TotalEnergies (TTE), and BP PLC (BP), which have consistently grown their output over the last five years.
On the bright side, Exxon has two of the most exciting growth projects in the oil industry, namely its projects offshore Guyana and in the Permian Basin. Thanks to several discoveries offshore Guyana, Exxon has more than tripled its reserves in the area, from 3.2 billion barrels in 2018 to approximately 11.0 billion. It also expects to grow its production in the Permian Basin significantly, from about 400,000 barrels per day this year to roughly 700,000 barrels per day in 2025.
However, during the pandemic, Exxon announced a significant shift in its strategy. The company decided to postpone some major growth projects to strengthen its balance sheet and enhance the margin of safety of its dividend. As a result, the oil giant now expects essentially flat production for at least another four years. Therefore, while Exxon is thriving right now, investors should know that the company primarily relies on high commodity prices, as its output will likely remain flat for many more years.
On the other hand, Chevron has a superior performance record compared to Exxon. It grew its production by 5% per year on average from 2017 to 2019. Even in 2020, when most oil producers reduced their production due to the pandemic, Chevron grew its output by 1%, partly thanks to its acquisition of Noble Energy, which enhanced the presence of Chevron in the Permian Basin. Moreover, Chevron expects its production to remain in an uptrend thanks to its promising pipeline of projects in the Permian Basin and Australia. Overall, in the comparison of XOM vs. CVX, Chevron has exhibited a better performance record than Exxon and has more promising future growth prospects ahead.
Valuation of XOM vs. CVX
The energy sector is characterized by dramatic boom-and-bust cycles. This fact means investors should be cautious in the valuation of energy stocks. For example, Exxon and Chevron are currently trading at a forward price-to-earnings ratios of 7.4X and 8.0X, respectively. These price-to-earnings ratios look extremely low on the surface and may lead some investors to think that the oil majors are deeply undervalued right now.
However, given the nearly 13-year high prices of oil and gas and the all-time high refining margins prevailing right now, it is prudent to assume that the energy sector is close to the peak of its cycle. Of course, no one can predict how long the Ukrainian crisis will last, but it is prudent to expect commodity prices to deflate in the long run.
Therefore, the nearly 10-year low earnings multiples of both stocks seem warranted. However, Chevron (CVX) has a higher price-to-earnings ratio vs. Exxon (XOM), but for a good reason, as it has more promising growth potential ahead.
Exxon and Chevron are the only Dividend Aristocrats and Dividend Champions in the oil and gas industry. According to Portfolio Insight*, they have grown their dividends for 40 and 35 consecutive years, respectively. Exxon Mobil is also one the longest dividend paying stocks. Given the high cyclicality of the oil industry, the dividend growth streaks of the two oil giants are admirable. The big question is which stock offers the most attractive dividend.
First of all, due to the rally of both stocks amid exceptionally favorable commodity prices, both stocks are currently offering nearly 5-year low dividend yields. However, Exxon is offering a 4.1% dividend yield, which is slightly higher than the 3.9% yield of Chevron. In addition, both stocks have payout ratios of 35%, meaning their dividends have a wide margin of safety for the foreseeable future.
On the other hand, the dividend of Chevron is more attractive in some aspects. During the last five years, Chevron has grown its dividend at a 5.1% average annual rate, in line with the median dividend growth rate of the energy sector. In contrast, Exxon has raised its dividend by only 3.1% per year on average during this period. Given its superior production growth prospects, Chevron will likely continue growing its dividend faster than Exxon.
It is also important to note that the dividend of Exxon came under pressure due to the pandemic in 2020 when the company froze its dividend for ten consecutive quarters. Exxon issued excessive debt to defend its dividend in that downturn, and many analysts questioned its dividend safety back then.
On the contrary, Chevron kept posting decent cash flows, and thus, no one questioned its dividend safety. Whenever the next downturn in the energy sector shows up, the dividend of Chevron is likely to have a wider margin of safety, though both oil giants will exhaust their means to defend their dividend growth streaks. Overall, Exxon is offering a slightly higher dividend yield than Chevron, but the dividend of Chevron has superior growth prospects and a wider margin of safety during downturns.
Final Thoughts of a Through Comparison of Exxon Mobil (XOM) vs. Chevron (CVX)
As long as oil and gas prices remain around multi-year highs, Exxon and Chevron will continue thriving, with negligible differences in their performance. With that said, Chevron seems to have more promising growth prospects than Exxon, and it appears more attractive from a long-term point of view. Moreover, Chevron’s superior growth prospects outweigh its premium valuation vs. Exxon and its slightly lower current dividend yield.
Disclosure: Members of the Sure Dividend team are long XOM and CVX.
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Aristofanis Papadatos applies fundamental and technical analysis and mainly use options as a tool for both investing and trading. He writes extensively on Seeking Alpha and is also a member of the Sure Dividend team. He is the author of two mathematics books ("Arithmetic calculations without a calculator" and "Word Problems").