The plunge in oil prices that started in mid-2014 forced integrated oil and natural gas giants ExxonMobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), and Royal Dutch Shell plc (NYSE:RDS-B) to retrench. Their financial results are finally starting to stabilize now that oil has been holding steadily in the $50-per-barrel range. However, they have been left with higher debt loads and a renewed outlook that includes range-bound oil prices for years to come. Which is the best buy today?
A few metrics to consider
One of the hangovers from the deep oil downturn is debt. All of the oil majors added leverage to their balance sheets so they could keep paying their distributions and fund planned capital expenditures. At the midpoint of 2017, Exxon had $4 billion in cash, with debt making up roughly 12% of its capital structure. That's a rock-solid balance sheet, but it's even more impressive when you consider that Exxon's debt is over three times larger than what it was at the start of 2014.
By comparison, Chevron had cash of around $4.7 billion at mid-year, and long-term debt made up roughly 19% of the company's capital structure. Royal Dutch Shell, meanwhile, had $24 billion in cash, and long-term debt was nearly 30% of the capital structure. All three are working to deleverage today, but Exxon clearly has the strongest finances.
Exxon is also one of the best-run oil majors when you look at return on capital employed. That basically examines how well a company uses its shareholders' money. The oil downturn led to return on capital employed falling for all of these companies. They're all starting to push the metric higher again now that oil prices appear to have stabilized. But it's the long-term view that matters here. Exxon isn't always tops on this metric, but it has historically beaten Shell and Chevron. Exxon wins here as well.
One place where Exxon isn't a clear winner is dividend yield. Exxon's yield is 3.7% today, compared with Chevron's 3.8% and Shell's 5.9%. However, Exxon can boast a 35-year streak of annual dividend increases. Shell's dividend has been held steady since the start of 2014. And while Chevron boasts of an annual streak of 29 years with increasing dividends, it held the dividend constant for 10 quarters during the oil downturn. The 29-year streak was kept alive because of the mid-year timing of its dividend increases. If you're only interested in yield, Shell is your best bet. But if you're interested in income and regular income growth, Exxon gets the nod.
The next issue to look at is valuation. The price to tangible book value for all three of these oil giants is off the lows seen during the worst of the oil downturn. However, Shell's price to tangible book value has recovered materially over the past year and is roughly at the midpoint of where it's been for most of the past decade. It's no longer cheap relative to its own history. Chevron is getting back into a more normal range as well.
Exxon's price to tangible book value, meanwhile, remains close to the lowest levels it's seen over the past 10 years. To be fair, Exxon's price to tangible book value ratio is above those of Chevron and Shell. But it has historically been higher, largely because investors consider it to be the best-run oil company. That Exxon appears cheap compared with its own history is what's noteworthy here. One again, Exxon comes out on top.
We have a winner
Exxon, Chevron, and Shell are all well-run companies, and any one of them could be a fine addition to your portfolio. But if you're a long-term investor, Exxon looks like the best overall option today when you consider historical valuations, financial strength, management's ability to put investor cash to work, and dividends. That said, if all you care about is yield, then Shell is your best bet -- but go in knowing that you may not be getting the best value.
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