ExxonMobil (XOM 1.54%) and BP (BP 0.25%) are two of the world's largest integrated oil majors. Exxon stock offers investors a yield of around 4.6%, while BP provides income seekers a much more impressive 6.3%. That, however, isn't enough information to make a call between these two energy giants. Here's what you need to know to figure out if Exxon or BP is the better buy today.
A little background
BP, formerly known as British Petroleum, has a bit of a checkered past -- it was at the heart of the Deep Water Horizon oil spill in 2010. That disaster in the Gulf of Mexico had a major impact on the entire oil industry, and was a transformational event for BP. The company cut its dividend, materially reduced its scale, and charted a new course for its remaining oil and natural gas businesses. And to be fair, management has done a great job of turning things around.
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Today, the company can boast a list of successes, including bringing 19 major projects safety online between 2015 and 2018. And it did so while growing its production and remaining under budget and ahead of schedule. Management needed to prove that BP was a different company following the Gulf of Mexico incident, and it has definitely done so. Looking to the future, it has another 15 projects coming online between 2019 and 2021 that it will spend between $13 and $14 billion per year on, a number have already started to produce oil. These moves, plus the acquisition of onshore U.S. oil assets from BHP, should help keep the oil giant's production growing.
Exxon's production, on the other hand, fell around 6% between 2015 and 2018 -- basically the opposite direction compared as BP's, leading investors to wonder if Exxon has lost its way. However, Exxon has laid out a plan to turn things around, with the intention of spending up to $30 billion a year through 2025 to get production growth back on track. It appears to have hit an important inflection point in the middle of 2018, when production began to turn higher on the strength of just one of its major investments (onshore U.S. oil drilling). There's no question that it is lagging behind BP time-wise, but it looks like Exxon is starting to turn an important corner as well.
Weighing the costs
So at this point both Exxon and BP look like they are doing reasonably well operationally speaking, and have solid plans to keep the trend heading in the right direction. But don't jump on BP's higher yield just yet -- there's more to the story.
One big issue to consider, especially for income investors, is the strength of each company's balance sheet. Exxon's financial debt-to-equity ratio is 0.12, compared to BP's 0.44. That's a major difference, with Exxon clearly in a stronger position to keep funding its growth projects no matter what happens to oil prices. That's exactly what it did during the deep oil downturn that started in mid-2014.
But that's not the whole story, because its peers (like BP) also leaned on their balance sheets to keep spending. The big difference is that Exxon was also able to keep increasing its dividend through that span. Its streak of annual dividend increases has now stretched to 37 years, a record that none of its major competitors can match. BP's dividend flatlined between the third quarter of 2014 and the first quarter of 2018, before increasing in the second quarter of 2018. Although both companies were able to manage through a painful market environment, Exxon did so while still rewarding investors with a growing income stream.
XOM Return on Capital Employed (TTM) data by YCharts
Meanwhile, Exxon has continued to best BP based on return on capital employed, which measures how well a company is using its shareholders' capital. So both are achieving success with their capital programs -- but Exxon looks like it is executing better than BP, which is not a new trend. Although Exxon is a large and conservative ship that often turns slowly, it has long been one of the industry's best run companies.
That said, BP looks cheap on a number of financial metrics compared to Exxon. The list includes its price-to-sales ratio, price-to-earnings, price-to-cash-flow, and price-to-book-value. However, its price-to-tangible-book-value ratio tells a different story: At 1.6 times, it's the lowest it has been since the late 1980s, and lower than BP's 1.8 times.
XOM Price to Tangible Book Value data by YCharts
Interestingly, BP's price to tangible book value has been on the upswing since 2015, indicating that investors are affording it a richer valuation. Exxon's valuation here has continued to fall, which suggests that investors are not giving the company credit for what management believes is a very strong set of investment opportunities. So Exxon looks like the cheaper option when you examine this metric, which looks at the amount of money an investor would likely receive if the company were liquidated.
Safety first
If you are looking to simply maximize the income your portfolio generates, then BP is a fine oil company to own. However, if you want to balance risk and reward, Exxon comes out on top here. Yes, the yield is notably lower, but at 4.6% it is still very generous. And that yield is backed by 37 years of annual increases, among the lowest leverage in the oil space, and a price-to-tangible-book-value that suggests investors aren't giving Exxon enough credit for the underlying improvement in its drilling operations. All in, Exxon appears to be the stronger option for most investors.
