Was Warren Buffett Wrong to Buy ExxonMobil Over Chevron?

In 2013, Berkshire Hathaway purchased 0.9% of ExxonMobil. This article explores why Warren Buffett likely signed off on this investment and why investors should instead invest in Exxon's competitor, Chevron.

Apr 14, 2014 at 1:59PM

Berkshire Hathaway's portfolio consists of 43 companies and is worth $92 billion. In 2013, the company purchased nearly 1% of ExxonMobil (NYSE:XOM). This represents about 3.5% of Berkshire's overall holdings and about 50% of its investments in the energy sector. With a move this big investors might ask if they should consider purchasing Exxon themselves. This article will explore the potential reasons for Berkshire's investment in Exxon and explain why Chevron (NYSE:CVX) makes a better long-term investment. 

ExxonMobil and Chevron are America's two largest oil companies. They are very well diversified across the upstream and downstream segments, as well as internationally. Chevron also owns substantial refining capacity, while Exxon has a large position in chemical manufacturing (such as automotive oils). In addition, both companies have extensive retail exposure with their branded gas stations. 

They are fundamentally great long-term investments for several reasons.

The case for Exxon
Exxon is a master of reserve replacement with over 20 consecutive years of finding more oil than it produces. Thanks to 2013's 103% reserve replacement rate the company now has 25.2 billion barrels of proven reserves. This is sufficient to cover its annual production (4 million barrels per day, or bpd) for nearly 14 years. 

On the production expansion front, the company is pursing over 120 projects to produce a total of 24 billion barrels of oil. Twenty-four of these projects are scheduled to come online by 2017, including 10 in 2014 (2014's projects will increase daily production capacity by 300,000 bpd). 

The company spent $42.5 billion on capital expenditures, or capex, in 2013, is guiding for $39.8 billion in 2014, and under $37 billion in 2015-2017. 

Despite the decreasing investments, management is guiding for flat production growth in 2014 and 4% increased oil production in 2015-2017 (gas increases of 1%). The increased production and lower costs will result in margin growth on (already) above industry average profitability. 

Adding the fundamental strengths just mentioned to Exxon's investing history makes a good case for owning the stock. In the last 21 years Exxon has returned 12.5% CAGR (with dividend reinvestment), compared to the market's 9.5%. The company is a dividend aristocrat with 31 consecutive years of payout increases (dividend growth of 6.11% CAGR for the last 20 years).  

As a final cherry on top, the company is trading at an 18% discount to its historical valuation (21-year average P/E of 15 versus 12.3 today). On a yield basis, Exxon is now the cheapest it has been in three years. 

All of this makes a strong case for owning Exxon shares, except for one problem: Chevron is as strong of a company and a better relative investment. 

Why Chevron is better

Company Yield 20 yr div growth (CAGR) 3 yr avg revenue growth 3 year avg EPS growth Operating Margin Net Margin
XOM 2.70% 6.11% 4.60% 2.30% 13.20% 7.40%
CVX 3.50% 7.26% 3.80% 4.00% 15.70% 9.40%
IND AVG 3.50%   9.40% 4.80% 11.60% 6.10%

Source: Morningstar.

As seen above, Chevron, despite being just as safe and diversified an oil giant, outperforms Exxon in the areas investors care about most: earnings growth, profitability, yield, and dividend growth.

Chevron is also a dividend aristocrat with 25 years of consecutive dividend increases. 

However, the largest reason for investors to choose Chevron over Exxon is the company's near-term growth prospects. 

Over the next four years, Chevron plans to increase its capacity by 20%, from 2.6 mboe/d to 3.1 mboe/d. It plans to maintain its 2014 capex rate of $35.8 billion through this time, and to spend the funds on deepwater offshore drilling, shale oil, and the Tengizchevroil consortium. This last project is a partnership of companies developing the Tengiz super-giant oil field in Kazakhstan. Chevron owns 50% of the consortium. 

The increased production, when combined with flat capex, will likely result in dividend growth accelerating to about 9% annually over the next five years.

XOM Dividend Yield (TTM) Chart

Source: YCharts

As seen in the above chart, both Chevron and Exxon are trading at their highest yields since 2011. Given the massive size and scope of their businesses, investors can be assured that neither company's survival is ever likely to be threatened. This makes either company a good "buy and hold forever" investment. 

Chevron's recent price weakness is a result of an earnings warning issued by the company. Poor weather in the U.S., Canada, and Kazakhstan during the fourth quarter, along with increased refinery maintenance and foreign currency effects, will cause the company to miss earnings by about $0.2 per share. 

Investors can use this short-sighted market overreaction to accumulate undervalued shares and lock in a historically high yield with probable strong dividend growth in the years to come. 

Foolish takeaway
ExxonMobil is a terrific company, and investors are likely to do well owning its shares over the long term (especially given how undervalued it is). However, due to its higher yield, faster dividend growth, and better short- to medium-term growth prospects (as well as higher profitability and equal undervaluation), I believe Chevron is a better long-term investment. 

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

 
 

Adam Galas has no position in any stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers