Small companies are riskier; big companies are safer. At least, that's the conventional wisdom. But size isn't always enough. It certainly hasn't helped the largest publicly traded U.S. oil company, ExxonMobil (XOM 1.63%), or the largest independent U.S. oil and gas exploration and production company, ConocoPhillips (COP 0.70%), over the last few years.
The shares of both of these domestic giants were hammered by the stock market when oil prices collapsed in 2014, and three years later, their prices still haven't fully recovered. But that could be a buying opportunity. Let's look at these titans of American oil and gas and see which one looks like the better buy.
Oil stocks have been hit hard by the downtrend in the energy industry, but there are still some good buys to be found. Image source: Getty Images.
Returns on capital
An excellent gauge of how well an oil company is managed is its Return on Capital Employed, a metric that measures how effectively management has been using investors' money. So, to begin with, let's look at how ExxonMobil and ConocoPhillips compare.
XOM Return on Capital Employed (TTM) data by YCharts
ExxonMobil has consistently outperformed its rival by this metric, despite both companies' returns having fallen -- and in ConocoPhillips' case, fallen into negative territory -- since the oil price slump began in 2014.
Now, it's worth noting that ExxonMobil, as an integrated oil major with both exploration/production and refining/marketing arms, has some advantages over the smaller ConocoPhillips, which is exclusively an exploration and production company. First of all, Exxon is a lot larger and better-capitalized than Conoco, and second, its refining and marketing operations have helped to prop up the business during the downturn, which means it has more capital to employ.
But these advantages don't change the fact that ExxonMobil has consistently earned better returns on its capital than has ConocoPhillips, so it takes the category.
Winner: ExxonMobil
Dividend
Oil prices seem to be mired at or near their current levels. And with oil stocks seeming unlikely to take off until oil prices increase, looking for dividend-paying stocks is almost essential for an oil investor at this point. A robust dividend will ensure that shareholders are earning at least some income while waiting for the industry's fortunes to improve. In fact, I would almost go so far as to counsel investors to avoid any oil and gas stock that isn't paying a dividend right now.
Luckily for us, both Exxon and Conoco pay dividends. But as with the rest of the companies' operations, the dividends are very different.
First of all, Exxon's is a lot larger. Exxon is currently paying a quarterly dividend of $0.77 per share, while Conoco only pays $0.265 per share each quarter. True, Exxon's share price is a lot higher than Conoco's, but Exxon's current yield of 3.8% is much better than Conoco's current yield of 2.3%.
Exxon's dividend is also more secure than Conoco's. ConocoPhillips was forced to slash its dividend by almost two-thirds in 2015, from $0.74 per share to just $0.25 per share. Exxon, on the other hand, is a "dividend aristocrat" that has been increasing its annual dividend payout for more than 25 consecutive years (and, in ExxonMobil's case, for more than 60 consecutive years). ExxonMobil isn't about to give up its coveted Dividend Aristocrat status now, so the yield, stability, and longevity of its dividend combine to give it the category.
Winner: ExxonMobil
Production
With oil prices mired around $50 a barrel, oil drillers have two options if they want to increase their profits:
- Cut costs. Both ExxonMobil and ConocoPhillips have already been aggressively cutting costs in recent years, and their free cash flows have improved as a result. The companies have also sold off underperforming assets to focus on profitable oil plays. ConocoPhillips has been particularly focused on asset sales in recent quarters, but ExxonMobil has made billions of dollars' worth of divestitures of its own.
- Produce more oil.
For all of its success, ExxonMobil has seen stagnant production numbers lately. However, the company has just greenlit a new offshore oil play in Guyana, which may help boost its production in the future. ConocoPhillips, too, is looking at lowered production as a result of its recent asset sales. Production dropped from 1.5 million barrel-of-oil equivalents per day in the first half of 2017 to an anticipated 1.2 million boe/d in Q3. Unlike its larger rival, though, ConocoPhillips isn't greenlighting big new projects and is instead using its resources to shore up its balance sheet.
So even though ExxonMobil's production has slowed, it's still in a better position moving forward than ConocoPhillips.
Winner: ExxonMobil
Investor takeaway
Sporting better returns, a better dividend, and a better production outlook, ExxonMobil wins this head-to-head matchup. For investors looking to invest in an oil company, in this particular case, bigger actually is better.
