Despite the recent sell-off and the ongoing impact of the COVID-19 pandemic on the broader economy, the stock market's rebound from its March lows has been a pleasant surprise for most investors. Not so much for shareholders of ExxonMobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), whose massive oil empires are struggling due to lower oil and gas prices, as well as lower refining margins from decreased demand for transportation fuels.
With both stocks down nearly 50% this year, it's time to take a look and see which one is better positioned for a rebound.
Stock performance comparison
Exxon and Shell are among the worst performing oil majors so far this year.
The damage has been especially bad the past three months, with Exxon and Shell losing 22% and 19%, respectively, compared to the S&P 500's 12% gain. For perspective, there was even a point in late August when electric car maker Tesla became worth more than ExxonMobil, Shell, and BP combined.
To compensate investors for the many long-term (energy transition and climate change) and short-term (volatile commodity prices and geopolitical issues) risks of investing in oil and gas, oil majors tend to pay big dividends. As stock prices go down, the return, or yield, on those dividends gets larger. Today, Exxon yields 9.4%, more than double Shell's yield of 4.5%. But a higher yield doesn't automatically make Exxon a better dividend stock than Shell.
For starters, Shell already cut its dividend by two-thirds in late April. It was the first time the oil major cut its dividend in 75 years. Shell has also drastically reduced spending, and suspended its share buyback program. This isn't to say that Shell couldn't cut its dividend again; it certainly could. But by taking the pressure off early and resetting expectations in one fell swoop, Shell is going to be less financially strained than Exxon in the short term.
For example, Shell now pays just $1.2 billion in dividends per quarter. Exxon's obligation is more than triple that at $3.7 billion per quarter, a whopping $10 billion more than Shell a year. This wouldn't be a problem if Exxon were bringing in enough cash, but it's not, leading to uncertainty surrounding the safety of ExxonMobil stock and its dividend.
Business performance comparison
In terms of spending, Shell and Exxon are very similar, with Shell expecting 2020 capital expenditures of $20 billion or less and Exxon expecting $23 billion. First-half 2020 revenue is also similar, with Shell generating $92.5 billion compared to Exxon's $88.8 billion. And although Shell's $18.1 billion first-half 2020 loss looks significantly worse than Exxon's $1.7 billion loss, $16.8 billion of Shell's loss came from a slew of accounting adjustments such as asset writedowns, adjustments and assumptions to prices, and market conditions. In fact, Shell actually posted positive adjusted earnings per share (EPS) in its first and second quarter this year, outperforming expectations.
Up until this point, Exxon and Shell are fairly similar. The difference becomes apparent when we look at cash flow from operating activities, where Shell generated $17.4 billion compared to Exxon's $6.3 billion in the first half of 2020. In 2017, Shell displaced Exxon as the leader in cash flow generation as its integrated gas business emerged to dominate its portfolio.
Integrated gas made up 28% of Shell's cash flow from operating activities in 2018, 36% in 2019, and 38% in the first half of 2020. In the first half of this year, integrated gas was Shell's highest cash flow generating segment and has generated more cash than Exxon's entire business so far this year. Exxon's inferior cash flow is concerning when you consider it expects to spend more and pay more in dividends than Shell.
The better buy
Exxon and Shell both have their fair share of risks. Even though Shell's dividend yields half of Exxon's, Shell looks to be the better buy now.
Shell did an impressive job of cutting its dividend and spending, and suspending share buybacks early into the pandemic. By maintaining its dividend, Exxon is positioning itself to return $10 billion more to shareholders than Shell -- money that would arguably be better used on its business during this difficult time. In sum, Shell is generating more cash than Exxon but spending less money. And although both companies could do well to improve their balance sheets, Shell appears to be better positioned to legitimately recover from this downturn in oil and gas than Exxon.