ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are two of the largest energy companies in the world, offering compelling yields of 5% and 4%, respectively. Dividend-focused investors might decide that Exxon's one percentage point yield advantage gives it the edge over Chevron, but don't jump so fast. There's a reason why Exxon yields more, and for some investors it might be enough to make Chevron the better buy. Here's a quick look at these two diversified oil and natural gas drillers to help you figure out which one is the better buy.
There's no point beating around the bush: Exxon and Chevron are very similar companies. They both have highly diversified energy businesses, spanning from the upstream (oil drilling) to the downstream (chemicals and refining) spaces. They are both very large companies, with market caps of $290 billion and $220 billion, respectively. Even their dividend yields, while hardly the same, are both materially above the roughly 2% yield you would get from an S&P 500 Index fund today.
In fact, an investor looking at these two oil and gas companies probably wouldn't go too far wrong thinking of them as roughly interchangeable. Still, they are not identical. Even their similarities show that there are subtle but often key differences -- and some of those differences could end up being very important over the next few years.
One of the areas in which both Exxon and Chevron stand out from their foreign peers is on the balance sheet. These two companies have long taken a conservative position with regard to debt. looking at their third quarter financial statements, Exxon and Chevron both have financial debt to equity ratios of around 0.15 times. That's low for any company in any industry, but notably below those of most of their integrated energy peers.
The big benefit is that this fiscal prudence gives the two companies a lot of flexibility. When the highly volatile oil and natural gas industry is going through a rough patch, this pair can use debt to help fund their capital spending plans and dividends. They're leaning on their financial strength to keep rewarding investors, while still investing in their businesses so they are well positioned for the eventual upturn. In fact, using their balance sheets like this is exactly how Exxon and Chevron have managed to increase their dividends annually for 37 and 32 years, respectively.
What's interesting right now, however, is that Exxon and Chevron have switched places. It's a nuance, to be sure, with Chevron's financial debt to equity ratio just slightly below that of Exxon's. But historically, Exxon has been the more conservative of the pair. That said, Chevron recently announced that it will be writing down the value of some of its assets by as much as $11 billion due to low energy prices. That's a non-cash charge that will come out of shareholder equity and, thus, increase its financial debt to equity ratio. But the broader trend here, of Chevron being more conservative, is unlikely to reverse in the near future (more on why in a second), so if you want the more conservative of a conservative set of oil drillers, then Chevron might be the better fit for you right now.
Spending and drilling
The big reason that Chevron appears like a more conservative option than Exxon today is because Exxon has plans to spend as much as $35 billion annually on capital investments through 2025. Chevron's plans will keep it spending closer to $20 billion. The key difference is that Exxon is spending heavily to reverse a multi-year downtrend in its production. While the spending is starting to show results, with production recently hitting an inflection point, Chevron appears to have positioned itself better. It spent on new drilling earlier than Exxon and is now reaping the benefits of that investment.
To put some numbers on that, Chevron expects to see its oil production increase between 3% and 4% annually over the next few years. Meanwhile, it is spending less of its cash flow on capital investments than any of its peers. That makes it the more conservative choice here, even if the asset write downs push its financial debt to equity ratio back over Exxon's. Conversely, Exxon is spending on big projects that, assuming they play out as expected, could end up materially boosting the company's production in the years ahead. It's just going to take some time and more leverage to get there. In fact, the company recently announced that it would sell additional assets to help fund its spending plans, largely to appease investors nervous about the impact that its capital investments will have on its balance sheet.
That said, Bank of America Merrill Lynch recently put out a note stating that it believes Exxon is set to see seven to eight years of solid production growth in the years ahead. That would be good news for sure, but it comes with material costs through at least 2025, and means that Exxon investors need to be comfortable with the company's balance sheet getting weaker before it gets stronger again. Chevron's lower capital spending plans simply put it in a better financial position, since it won't need to rely as heavily on its balance sheet to fund its growth projects.
How conservative are you?
In the end, Exxon and Chevron are both very well run energy companies. And you could probably view them as largely interchangeable. However, they are on slightly different paths today. In a reversal of the norm, Chevron is the more conservative of the pair because of the strength of its balance sheet, relatively low capital spending plans, and its solid production outlook. Exxon, while hardly a high-risk investment, is still spending heavily to get its production heading in a better direction. Normally, Exxon gets the nod as the most conservative oil major, but right now it looks like that title belongs to Chevron. So depending on how risk-averse you are, Chevron could be the better option for you today despite its lower yield.