Oil prices are suffering from a massive supply/demand disruption driven by the global economic closures used to slow the spread of COVID-19. It has been a devastating blow to the industry, with the price of black gold actually falling below zero at one point in early 2020. The implications for integrated energy giants like ExxonMobil (NYSE:XOM) and BP (NYSE:BP) have not been very good.
But these two industry giants are not equal. Here's why Exxon stands out.
1. A position of financial strength
Exxon has long prided itself on taking a conservative approach to the management of its balance sheet. It entered the year with a debt to equity ratio of around 0.25 times. That strong financial position provided the company with ample room to add debt to help raise the cash it needed to muddle through a difficult period. By the end of the first quarter, debt to equity was up to roughly 0.33 times. It will probably go higher than that before this rough patch is over. But this puts Exxon in a much better position than BP.
Like many of its European peers, BP has a history of carrying higher debt loads, along with higher cash balances. But that's not the same as having a low debt load -- when times are tough, adding more debt to an already debt-heavy balance sheet isn't desirable. And burning through the cash balance is similarly unpleasant when maintaining liquidity is a paramount concern among investors. BP entered the year with a debt to equity ratio of around 0.7 times. By the end of the first quarter, the ratio was up to almost 0.8 times. It has a lot less balance sheet flexibility than Exxon.
2. An incredible dividend record
Exxon has muddled through difficult energy markets before and come through in one piece. The global oil and natural gas giant has increased its dividend annually for 37 consecutive years. There's no way to guarantee that that streak will continue, but management clearly makes returning cash to investors a high priority -- after all, the industry has been through a number of highs and lows over the last three-plus decades.
It's not that BP doesn't view dividends as important, but back when the company was known as British Petroleum it had to deal with a material environmental disaster (the Deepwater Horizon in the Gulf of Mexico). That was around a decade ago at this point, but it resulted in a complete reshaping of BP's business, in addition to a name change. Basically, the company was forced to sell assets to help pay for the costs of the disaster. And management ended up spending a huge amount of time on the issue, while peers were able to continue plugging along as usual. Oh, and BP cut its dividend. To be fair, it was the right move for the company, which was, in many ways, fighting for its very existence. But it's hard to suggest that BP can stand toe to toe with Exxon on the dividend front.
3. Execution is key
Another area where Exxon excels relative to BP is how well it allocates capital. A key metric in the industry is return on capital employed (ROCE). At the end of the first quarter, Exxon's ROCE was roughly 5.6%. BP's number was just 1%. Exxon is doing a much better job for its shareholders.
However, this is just a point in time. If you go back to the turn of the century, Exxon bested BP with regard to ROCE for almost the entire 20-year span. And even when the two were close, BP never outshined Exxon on this vital industry metric.
To be fair, times are tough today in the energy sector, and returns have been falling and are pretty dismal. but that only makes Exxon look that much more attractive since this is exactly the point in time when execution is likely to matter most.
Better, but not perfect
Examining these key points, Exxon looks like a better option than BP today. However, that doesn't mean that Exxon is firing on all cylinders. It's struggling just like every other oil major, taking steps like cutting operating costs, reducing capital spending, and increasing its debt levels (as noted above). So this is more like picking which dirty shirt is cleanest. But if you can think long-term while others are focused on the short term, Exxon appears to be a better investment choice than BP in some very important ways.