A Tale of 2 Oils: Why ExxonMobil and Chevron Headed in Different Directions

In this segment from MarketFoolery, host Chris Hill and analyst Taylor Muckerman review the newest data out of two of the biggest names in the oil industry: ExxonMobil (XOM -0.41%), where profits were up 18%, and Chevron (CVX 0.22%), where they soared by more than 50%.

The duo talk about the difficulty of making accurate forecasts in the energy sector, share buybacks, dividends, and the companies' potential growth drivers and headwinds. And they have a few ideas about where folks seeking more oil and gas exposure should look.

A full transcript follows the video.

This video was recorded on July 30, 2018.

Chris Hill: Last week was so busy, in terms of earnings stories, that, on Motley Fool Money, we didn't have a guest. We just did earnings for almost the entire show. Even with that, there were big, relevant companies that we weren't able to make time for. I wanted to get to two of them with you. That's ExxonMobil and Chevron.

Both reported last Friday, second quarter results for ExxonMobil and Chevron. ExxonMobil, profits up 18%, but you look at the refinery business, you look at the chemical business, there's still some weakness there. Chevron, their profit more than doubled from a year ago. Not that the stock took off, but it certainly went north, whereas ExxonMobil sold off a little bit. We can take these together, we can take them one at a time.

Taylor Muckerman: It seems like little bit of a tale of two companies. Both of them are integrated oil companies, so, you have the upstream, with the oil and gas exploration and production; and then the downstream, the refining business; and then, the chemical side of things. Typically, you see one of the businesses doing well and the other one doing poorly. In this regard, Exxon missed expectations across the board, all three segments missing expectations from Wall Street. I mentioned last week, I'm not too sure how accurate expectations are in the energy sector these days, because it's still in a state of flux with the price ramping up.

But, Exxon, the only supermajor that didn't have an announcement for a share buyback program. Chevron, after four years, reinstated theirs at about $3 billion. Buying back about 1% of shares, not quite as big as Caterpillar's $10 billion announced share buyback program that they're going to start at the beginning of 2019, but, still impressive for Chevron. Both the companies covering their dividend with free cash flow, which is not always the case with these big energy companies. A lot of times, they're paying that dividend out of debt. But with the price of oil doing what it's been doing over the last few months, both companies are free cash flow positive, even after dividends being paid. Some room there.

Chevron, kind of done with its big capital spending on long-term projects. They're going to be relying more on the Permian Basin and oil production to drive the needle over the next year or so. Their LNG build out in Australia, pretty much done. That's going to be coming online full force here in the next few months to a year.

If I was looking at either one of these companies to invest in, Chevron would certainly take the cake for me. Exxon seems too utility-esque, and maybe not even as strong of a performer as a utility. The size, too hard of a ship to steer. Capital spending, not what it was several years ago. Longtail projects, I worry about that, as well.

Hill: You look over the past year or so, and Chevron has absolutely been the better performer, the better operator, and it shows up in the stock performance. ExxonMobil is basically flat over the past year, and Chevron is up about 15-16%, something like that. Let's be clear, Chevron is a $200 billion company. It's not some young, nimble start-up.

Muckerman: Supermajor is a very accurate descriptor.

Hill: Right! ExxonMobil, somewhere around $350 billion. But, it's interesting. I remember years ago, you and I on this podcast, once we saw the price of oil starting to come down. We were talking, among other things, about, when you look out across this landscape, who's best positioned to deal with this? You said, "It's the bigger players. They have more in reserve, literally. They also have more cash. They can be pretty smart about acquisitions. This is one of those times when cash is king."

ExxonMobil is a behemoth and has earned its way to that status. Look, I'm not sitting here saying, "I think they're done at ExxonMobil." Of course, I'm not saying that. But it really does seem like they have some operational challenges that they have really not figured out in over a year.

Muckerman: You know, back then, when the price of oil was declining, they were the safer play. You saw the share price of these big companies not decline nearly as much as some more pure oil plays in North America. But, they just don't have that upside movement, either. That's why I think of these guys as more of a utility.

Exxon has become more natural gas-heavy than it has been in the last couple of years. That might be a little bit of a reason why they haven't had that upside with oil prices coming back from the $30-40 range, now up to the $60-70 range. That could be an issue. Yeah, if you're looking for some growth outside of just a dividend check, these aren't the companies you want to focus on.

But, I do think Exxon has a decent long-term outlook, when you look at the chemical side of the business. Regardless of what you think about the use of oil and demand for oil, the chemical side of things, I think, is going to continue to be a growing business. They've been investing a lot of money down on the Gulf Coast for their chemicals business. It isn't nearly as big as the oil side, but I think it might have longer legs.

Hill: I'm glad you mentioned Chevron's stock buyback. As you said, it's been years since they've done that. $3 billion buyback plan. Although, I did note that the company was asked if this was sustainable, and they said, "Yes, this is sustainable, as long as oil market conditions don't take a dramatic turn for the worse." I mean, that's smart of them. I don't begrudge them saying that.

I'm curious, when you think about the capital allocation of these two companies -- whether it's stock buyback plans or dividend plans -- it seems like, despite everything I just said about ExxonMobil, they have a better track record, certainly, on the dividend side of things, certainly a longer track record. I was talking to Jeff Fischer, right before we came in the studio, about this -- the thing about stock buyback plans is, companies announce them, and basically, when companies announce that, it's almost like, "This is our plan. It's not written in stone. We're going to do this." In the case of Chevron, they were very specific, "We're going to do this $3 billion plan, as long as it's sustainable."

But, there are companies out there that announce it, and then don't even come close to whatever the big, splashy number is. Again, it seems like ExxonMobil has that stronger track record, whether we're talking about buybacks or dividends.

Muckerman: It has a lot to do with free cash flow generation. When you look at Exxon, it's had positive free cash flow. It ebbs and flows, but they've had positive free cash flow since at least 2012. Chevron, you look a 2013 through 2016, they're in the red on the free cash flow line. Exxon has had a little bit more flexibility there. That might have a little bit more to do with size.

But you also have, Chevron was out there spending quite a bit of money on capital expenditures. I mentioned their LNG projects out in Australia and elsewhere. Not cheap projects that have been taking several years to finally come to fruition. Maybe that's where their cash was going, these bigger projects. Whereas, Exxon, paying a little bit more consistent dividend, and on the share buyback side.

Two different ways of spending cash. We'll see how well that LNG expenditure ramp that Chevron went on for several years pays off. I think it will, because natural gas and LNG are certainly becoming a bigger part of global trade. So, it'll take time to really prove that out. But, I think, you had two different uses of cash, and Exxon decided to return more of it to shareholders.

Hill: These are two of the biggest players in the industry. Is there an under-the-radar company that you like to watch going into earnings season in this industry?

Muckerman: BP is always an interesting story, ever since the terrible disaster in the Gulf of Mexico. I like them. They've streamlined the operations, because they had to. They had to sell off billions of dollars' worth of assets. A little bit smaller of an operation than they used to be. They just dropped $10 billion on North American shale assets recently, the largest M&A deal in the industry this year. They're trying to get back to that growth status. It's a company that I'd keep my eye on in the industry, if you want to get some oil and gas exposure.