Oil prices are (finally) heading higher, and with the summer driving season just around the corner, it makes sense to take a look at the energy industry. Let's go straight to the top with the two largest publicly traded oil companies in the world by market cap, ExxonMobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B).
Both companies stand to benefit from rising oil prices, and both have diversified portfolios with upstream (exploration and production) and downstream (refining and marketing) assets. But let's look a little more closely at these Big Oil bigwigs to see which one is really the better buy.
A quick look at the two companies' P/E ratios seems to show that Shell has the superior valuation, trading at just 11.4 times earnings while Exxon trades at 16.8 times. In fact, Shell's P/E ratio is currently the lowest among all the oil majors -- a group that also includes Chevron, BP, and Total -- while Exxon's is the highest of the group.
But current P/E ratio doesn't necessarily tell us the whole story. It could be that Shell's P/E consistently trades lower than Exxon's, and this doesn't indicate that Shell is undervalued. However, that isn't actually the case here. Over the last ten years, Exxon and Shell have alternated having the lower P/E ratio (lower is better), and since the beginning of 2017, they've always been within a few points of one another. This 5.4-point spread is actually one of the biggest discrepancies in their valuations during that time:
Although both companies' valuations are the lowest they've been since the oil price slump ended in 2017, indicating that both may have room to grow, Shell's is 32.1% lower than Exxon's, which has seldom happened. Shell wins this category.
Winner: Royal Dutch Shell
Both Exxon and Shell pay reliable dividends. ExxonMobil is a so-called "dividend aristocrat," a company that has increased its payout every year for at least the last 25 years. Shell hasn't had the long history of annual dividend increases that Exxon has, but it regularly increased its dividend until 2014 and has held it steady since. Shell currently sports the best dividend yield among the oil majors, at 5.9%. Exxon's current 4.1% yield isn't too shabby, but it's low for an oil major (only Chevron's is currently lower, at 3.8%).
Both companies are churning out plenty of cash to cover their dividends, and neither one cut its dividend even in the depths of the 2014-2017 oil price slump. Shell did move to a scrip dividend program during that time, offering investors the option of receiving partial shares as a dividend instead of cash, but it's since shut down that program and returned to an all-cash dividend payout.
Given that both companies have good dividend coverage and managed to sustain their payouts even during the oil price slump, when money was tight, the higher yield wins the prize here.
Winner: Royal Dutch Shell
Lack of growth
Shell and Exxon are two of the largest companies in the world by revenue. And while both pay dividends and are trading at attractive valuations, they still need to be thinking about growth. In particular, production growth of oil and gas is important. As wells age, they tend to produce less, and if Exxon and Shell are going to reap the benefits of higher oil prices, they can't afford to let their production drop off.
Exxon has had issues with slackening production in recent years. The company's production has fallen every year since 2015. But it seems as though Exxon's quarterly production may have hit a floor of 3.6 million barrel of oil equivalents per day (BOE/D, a standard production measure for oil and gas) in Q2 2018. Production increased to 3.8 million BOE/D in Q3 and 4.0 million BOE/D in both Q4 2018 and the recently completed Q1 2019. Exxon also has some promising deepwater assets in South America that could help accelerate production increases when they start to come online in 2020.
Meanwhile, Shell's annual production has been hovering at about 3.7 million BOE/D for the past few years. There have been some quarterly fluctuations as the company divested certain assets and brought others online, but Shell has seemed more interested in big investments in other areas, like in an LNG processing plant on Canada's west coast and renewable energy assets.
This one is tough to call, because Exxon seems to have turned the corner on production declines, while Shell's production -- thanks in large part to asset divestitures -- has been stagnant. Let's give Exxon the benefit of the doubt and the win in this category.
And the winner is...
Royal Dutch Shell is trouncing its Big Oil rival by several metrics: Its valuation is lower, its dividend yield is higher, and it hasn't seen the recent production declines ExxonMobil has, despite Shell's sale of several assets. Shell is the clear winner, and the better buy right now.