In this corner...the largest oil company in the world! 

In the opposite corner...also the largest oil company in the world!

Today, it's a clash of the titans of the oil industry. I'm pitting ExxonMobil (NYSE:XOM), the biggest oil and gas company in the world by market cap, against Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B), the biggest oil and gas company in the world by revenue. Both are massive companies...and also massive underperformers.  Over the last five years, both stocks have lost more than half their value. So let's try to figure out which one is the better buy today. 

Offshore oil rigs at sunset.

Image source: Getty Images.

Diving dividend

Let's lead off with one of the longtime bright spots of Big Oil: dividends.

Probably the most significant piece of recent news from either company is Shell's late-April announcement that it was cutting its dividend by two-thirds, down to just $0.32/ADR share. This surprise move, the company's first dividend cut since World War II, took Shell from being the highest yielder among the five oil majors to the lowest. Its share price tumbled in response. Once the dust settled, Shell was yielding just 4.4%. 

That's a far cry from Exxon's current 8.3% yield, but the big question is whether Exxon might follow in Shell's footsteps and slash its own dividend sometime in the near future. Today's low oil prices mean most (if not all) oil production is unprofitable right now. That means Exxon is going to have to take on substantial debt to keep its dividend fully funded. Indeed, in the first quarter of 2020, the company added $13 billion of debt to its balance sheet (although its total debt load of $59.6 billion is still much lower than Shell's $95.1 billion).

Exxon is currently a Dividend Aristocrat that has upped its payout annually for the last 37 straight years, and that's a big draw for investors. CEO Darren Woods knows it, too, saying on the Q1 2020 earnings call: "[I]f you look at our shareholder base, about 70% of them are retail or long-term investors that look for our dividend and see that as an important source of stability in their income. And so we have a strong commitment to that." Shell, meanwhile, hadn't increased its dividend in five years. 

While Woods hasn't said outright that he won't cut the dividend -- no CEO would ever make such a rigid pronouncement -- he emphasized over and over again on the earnings call that the company's priority is to offer a "reliable, growing dividend" (he used the phrase multiple times). Since it seems like ExxonMobil is likely to go to great lengths to preserve its Dividend Aristocrat status, it wins this category.

Winner: ExxonMobil

Weathering the storm

The main problem for ExxonMobil and Shell in the near term are the low prices for oil, natural gas, and refined products. Global oversupply combined with a lack of demand due to coronavirus-related declines in fuel consumption have hit both companies hard. One company, though, seems to have been hit harder than the other. 

Obviously, the two companies have different portfolios, so it isn't an exact apples-to-apples comparison. But we can look at how each one fared in Q1 2020, as the coronavirus pandemic was just beginning, and compare it to their past performance to get a sense of which one's operations are more resilient.

Here again, ExxonMobil seems to beat Shell. Exxon posted a wider Q1 net loss than Shell, but much of that was due to noncash writedowns on the value of the company's oil inventories. Shell's Q1 revenue was down 28.3% from the prior-year quarter, compared to just an 11.6% decline for Exxon. Similarly, adjusted net income, which strips out those inventory writedowns and other special items, fell much further year-over-year for Shell (down 47.2% compared to ExxonMobil's 4.1%). 

Shell's Q1 operating cash flow seems to blast Exxon's out of the water, $14.9 billion to $6.3 billion, but when you exclude working capital changes -- which strips out a $9.6 billion inventory decrease on Shell's part -- the numbers are nearly identical: $7.3 billion for ExxonMobil and $7.4 billion for Shell. 

Of course, this was in a quarter in which the average per-barrel price of Brent Crude was $50; in the second quarter, that price has ranged from the high teens to the low $30s. Plus, both companies are in the process of making big cuts to their capital and operational budgets, which could benefit one company's finances more than the other. However, based on their Q1 performance, Exxon seems better positioned to weather the current downturn.

Winner: ExxonMobil

And the winner is...

ExxonMobil looks to be better situated than Shell in terms of dividend and ability to weather the current crisis, plus it currently has a lower debt load. ExxonMobil is the better buy. 

However, the oil sector is a total mess right now, with low prices, lack of available storage, and reduced demand all conspiring to create an industrywide catastrophe that's not going to vanish overnight. Both Exxon and Shell are probably looking at years of underperformance ahead. Dividend investors may want to consider buying in, but other investors should probably steer clear of both companies for now.