Oil prices have gone on a wild ride in 2020, with energy companies like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) taking massive hits on the top and bottom lines. It shouldn't be much of a surprise to see that their stocks have been laid low as well, with Chevron down around 28% so far this year and Exxon off by roughly 38%. If you are looking at the out-of-favor energy sector for investment ideas, however, this pair might be worth examining. But is one a better pick than the other?
Although oil prices literally fell to zero at one point in the first half of 2020, both Chevron and Exxon are likely to survive this rough patch. They are both financially strong companies (more on this in a second) with diversified operations and take a long-term view of the energy market. That means they examine supply and demand over decades, not months. Today, the big issue is the supply disruption caused by the global economic shutdowns used to slow the spread of COVID-19. That is a big problem, but not one that's likely to linger forever, noting that there are massive efforts around the world to develop a vaccine.
Longer term, Exxon and Chevron both recognize that there are clean energy headwinds they have to deal with. However, changing between energy sources takes time and there's likely a great deal of leeway between today's carbon-heavy energy world and one that is focused on carbon-light power options. So there's a reason for longer-term optimism as well. Both will likely get through the current energy market in stride and, in this regard, are on equal footing to benefit from the still-positive long-term trends they expect to unfold.
A balance sheet difference
That said, while Exxon and Chevron both have very strong balance sheets relative to their energy major peers, they are not on equal footing when compared to each other. At the start of 2020, Exxon's debt-to-equity ratio was around 0.25 times, a fairly modest ratio near the bottom of its global peer group. However, Chevron's roughly 0.2 times was even better.
At the risk of understatement, things have changed a little since the start of the year. Notably, Exxon has issued a material amount of debt so that it can continue to support an aggressive capital investment plan and its dividend. Its debt-to-equity ratio is currently close to 0.4 times. That's not a terrible number and is still pretty solid compared to most peers. But Chevron's ratio is still way better, at roughly 0.25 times. Chevron didn't issue as much debt to support its operations through this difficult period and its capital investment plans aren't as sizable as Exxon's (largely because it is currently benefiting from previous spending). When looking at financial strength, Chevron is the clear winner, even though both are in solid positions relative to peers.
Getting paid to stick around
That brings up the dividends these two energy giants offer. Exxon's yield is a huge 8% and its dividend has increased annually for 37 consecutive years. Chevron's yield is more modest, at around 5.9%, and its dividend has increased for 33 years running. Both companies have basically stated that their dividends remain important avenues for returning value to investors.
That said, Exxon's dividend future isn't quite as certain as that of Chevron's. That's why there's a two-percentage-point difference between the dividend yields these two stocks offer today. There are a couple of reasons for this, starting with Exxon's higher leverage. But added to it is the fact that Exxon is in the middle of a spending program that it really needs to finish or its production will start to lag behind its peers. Hitting pause isn't really a good long-term option. If push came to shove, the dividend would likely be sacrificed, noting that the company has already said it doesn't plan to add any more debt. Chevron's production and spending situations aren't nearly as dire. Put simply, Chevron's dividend looks more secure. Once again, Chevron comes out ahead right now.
Tough call, but the differences matter
Ultimately, both Exxon and Chevron are very well-run energy companies that are likely to muddle through this downturn. Investors looking for an energy play would probably be just fine with either one. However, if you are a conservative investor with a dividend focus, Chevron appears to be in better shape to survive while continuing to reward investors via dividends right now. If you have owned Exxon for many years it may not make sense to sell it, but if you are looking to initiate a new position, Chevron probably has the edge.