The oil and natural gas sector is getting hammered today by a painful combination of factors. There are already companies succumbing to bankruptcy, and there will likely be more before this down cycle is through. However, U.S. energy giants ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are both likely to survive. Is one a better buy than the other?
1. It's really ugly out there in oil land
Low oil and natural gas prices aren't actually a new thing. Years of production growth in the United States have been upending the global supply/demand dynamics for quite some time, which put downward pressure on oil prices. To combat this, OPEC had been orchestrating production cuts. Earlier this year, however, Russia and OPEC got into a tiff over cuts and started a price war. That pushed commodity prices in the energy sector sharply lower.
Although Russia, OPEC, and the United States have appeared to come to terms on broader production cuts, the pain hasn't let up. That's because the efforts to combat the spread of COVID-19 have left economies around the world shuttered, and oil demand has plummeted. That's put extra downward pressure on prices, and, worse, left oil to pile up in storage. All of that extra oil has to be worked off before prices can start to recover in a sustained manner. Energy is a cyclical industry, so downturns aren't unusual, but this one is already very painful, and that pain is likely to linger. Investors are right to be generally worried about energy stocks.
2. They are built to handle adversity
That's the backdrop against which Exxon and Chevron are operating today. However, these two global energy giants know how to handle hard times, and that starts with their balance sheets. At the end of 2019, Chevron and Exxon had the lowest financial debt to equity ratios of any of the major integrated energy giants they compete against. Chevron's financial debt to equity was 0.12 times, with Exxon coming in a touch higher at 0.15 times. Both would be low for any company in any industry. This gives them the ability to lean on their balance sheets during tough times so they can keep investing in their businesses and paying dividends.
That said, Exxon has already started to tap the debt markets, issuing around $18 billion in bonds since the start of the year. In roughly four months, the company has increased its long-term debt pile by nearly 70%. That's a huge uptick, and it will materially change the company's leverage profile. However, that extra cash will help it survive through this downturn, and Exxon's financial debt to equity ratio will still be reasonable, even modest, relative to most of its peers other than Chevron.
As for Chevron, it has yet to make a big move with its balance sheet (more on this below). In other words, it appears to be in better financial shape than Exxon today.
3. Reducing spending
In addition to raising extra cash, Exxon has also announced plans to reign in its spending. At this point it expects to reduce capital expenditures by 30% in 2020. It is also working to reduce its ongoing operating costs by around 15%. Chevron is generally doing the same thing, looking to reduce its capital spending plans by around 20% in 2020. These are the right moves in a world that's awash in oil, as they allow the companies to save money and reign in production to some degree.
However, there's a notable difference here: Exxon has been ramping up its capital spending plans in recent years. Taking a countercyclical approach, it had been planning to spend as much as $35 billion a year through 2025. The reduction in spending will bring 2020's spend down to around $23 billion from a planned $33 billion. Chevron's pullback will reduce its spending to roughly $16 billion from $20 billion or so. This is an important difference, as Chevron's spending was already modest relative to that of its peers. Exxon simply needs more cash than Chevron right now because it has taken a more aggressive position within the industry than its domestic rival. Once again, Chevron appears better positioned for the current energy market.
It is highly likely that both Exxon and Chevron muddle through this deep energy downturn. It isn't going to be easy and it may take a little while, noting the oil piling up in storage.
That said, going into this difficult period Exxon and Chevron were on very different trajectories. Exxon was shifting to a more aggressive spending phase, and Chevron, which had been in a spending phase a few years ago, was collecting the fruits of its previous labor and didn't have to spend as much. For conservative investors, Chevron is the easy win here. Although there's nothing inherently wrong with Exxon or what it is doing, the risks are elevated -- as evidenced by its higher spending and the early effort to add more debt in the face of adversity.