After a couple years of declining or low oil prices, share prices for many energy companies are pretty attractive. Two companies that any investor will inevitably come across when looking at investing in this industry are ConocoPhillips (NYSE:COP) and ExxonMobil (NYSE:XOM). They're both industry stalwarts with recognizable names, but as investments they're far more different than some might realize. Which one is a better investment for you comes down to the kind of investor you are.
Betting on the upshot
A major misconception that some investors have about ConocoPhillips is that it is typically lumped in with big oil stocks, because like ExxonMobil and others, it produces a lot of oil on a daily basis. There is, however, a major distinction that separates ConocoPhillips from the other big oil companies. For ConocoPhillips, production of oil and gas is its only revenue source, whereas ExxonMobil has assets in every part of the value chain of oil and gas.
What this means, financially speaking, is that ConocoPhillips' results are much more dependent on the ups and downs of oil and gas prices. This isn't necessarily a good or bad thing; it just means that your investing objectives for these two stocks is different. In the case of ConocoPhillips, investing in the company today means that you are making a larger bet that the company's profits are going to rise as oil and gas prices increase and the company lowers the costs to extract a barrel of oil from the ground.
Of the pure-play exploration and production companies out there, you will be hard pressed to find one that is better positioned than ConocoPhillips. Between 2014 and so far this year, the company has been able to increase overall production by a modest 2.4% while reducing operating costs by about 30%. The company has also brought its operational cash flow and capital spending more or less in line such that it isn't burning through mountains of cash like other producers are recently.
According to management, there is a lot of upside when prices to rise. For every dollar that Brent crude prices rise, ConocoPhillips estimates net income will increase by $100 million to $120 million. So when the price of hydrocarbons does start to increase again, ConocoPhillips should capture some big gains.
By contrast, ExxonMobil is less an investment in the rise of oil and gas prices, and more an investment in the long-term health of the industry overall. With assets in production, infrastructure, refining, petrochemicals, and retail, ExxonMobil's business isn't as wholly reliant on the price of oil as ConocoPhillips. Exploration and production is a huge part of the business and typically makes up one of the largest chunks of earnings and its capital spending budget. Those other assets, though, have helped to offset the declines from production to a certain degree and have allowed ExxonMobil to continue to invest through the industry downturn.
This, more than anything else, is the compelling part about investing in ExxonMobil. Its diverse assets help to offset the volatility of commodity prices. What separates ExxonMobil from its big oil peers is that it is better at investing through the ups and downs of the cycle and has historically been much more conservative with its capital allocation.
You aren't going to reap the benefits of rising oil prices with shares of ExxonMobil as much as you will with shares of ConocoPhillips, but the benefit is that investing in ExxonMobil now is getting a company that can generate solid profits in almost any aspect of the commodity cycle. It also helps that ExoxnMobil has been able to maintain a dividend throughout this downturn and has given no indication that it will end its streak of 32 years of rising dividend payments.
What a Fool Believes
Investing in ConocoPhillips versus ExxonMobil comes very much down to your personal investing style. For those that want to take a shorter-term bet on the rise of oil and gas prices, then ConocoPhillips is the much better choice. Conversely, if you are looking for an steady investment that will likely continue to churn out dividend checks and maintain a solid business through the volatile commodity markets, then ExxonMobil is the stock for you. Personally, I gravitate more toward Exxon because I have no idea when oil and gas prices are going to rise and to what level, so I'll take the profitable business that can handle a wider range of commodity environments.