To say that 2020 has been bad for U.S. energy giants Chevron (CVX 0.94%) and ExxonMobil (XOM 2.04%) would be a vast understatement. With countries around the world effectively shutting their economies to slow the spread of the coronavirus, demand for oil fell off a cliff, and took energy stocks along with it. But there was an interesting and important change that accompanied this terrible industry downturn: Chevron is now in a notably stronger financial position than Exxon. Here's a look at what's going on.
It is really bad
A quick review of the stock prices of Chevron and Exxon is all it takes to see the damage that has been done in the energy sector, with their shares off by around 27% and 45%, respectively, so far in 2020. There's a great deal of information contained in those numbers, however, and Chevron's stock is clearly performing much better than Exxon's. There's a very good reason for that.
Exxon entered 2020 with huge spending plans as it looked to reverse several years of production declines. That cash outlay already appeared like a stretch in January, with some investors worried the company wouldn't be able to pull off the spending and keep growing its dividend. And then the coronavirus pandemic upended the energy sector, with a decline in demand pushing oil and natural gas prices to painful lows.
Exxon was forced to sharply curtail its spending plans, and it didn't increase its quarterly dividend during the year. Because it last increased the dividend in the middle of 2019, the company's streak of annual increases is still alive. But investors are more worried than ever that the dividend is at risk. That fear wasn't materially assuaged by a recent company announcement that 2021 capital spending would be further reduced. Also troubling, Exxon is taking a massive write down on assets it now deems uneconomic.
Chevron entered 2020 in comparatively better shape, as past spending meant it didn't need to put as much capital to work to support its production. And while low oil prices have forced it to take on debt to fund its dividend during the year, the hit to the company's balance sheet wasn't nearly as material. As you might expect, investors have been less negative on the stock.
That brings the story to the third quarter, and a comparison between the balance sheets of Exxon and Chevron.
How big is the difference?
Between the end of 2019 and the third quarter of 2020, Exxon's total long-term debt load increased by roughly 50%. Most of that jump came in the first half of the year, meaning that the oil giant added a huge amount of debt in a very short period of time. Chevron, by comparison, increased its long-term debt load by around 30%. Although most of Chevron's increase came in the first six months of the year as well, the increase was spread more evenly across the first three quarters. That suggests that Exxon's need for cash was much more dire, which makes sense given its large spending plans at the start of the year.
The different trajectories on the debt front had a material impact on leverage. Chevron started the year with a debt to equity ratio of around 0.2 times. It ended the third quarter with a debt to equity ratio of roughly 0.26 times. Its financial condition remains very strong, and in fact didn't really change all that much, despite a large increase in the debt it is carrying.
Exxon, on the other hand, has seen its debt to equity ratio go from around 0.25 times to nearly 0.4 times. That's a much more material increase in leverage. It would be hard to suggest that Exxon's balance sheet is in terrible shape, but it is clearly carrying much more leverage than Chevron. Enough, in fact, that management indicated during Exxon's third-quarter 2020 earnings conference call that it doesn't want to add any more debt to the picture.
As noted above, subsequent to the end of the quarter, Exxon announced that it would be taking a huge write-off of up to $20 billion. That money will likely come entirely out of shareholder equity. There are two things to consider here. First, a $20 billion charge would wipe out about 10% of Exxon's shareholder equity. That's a pretty big change. Second, it would also change the debt to equity math, since it reduces the equity side of the equation. In other words, Exxon's leverage is likely to step higher again in the fourth quarter. Exxon is highly likely to muddle through this industry downturn, like it has many downturns before, but it is not going to be easy.
For many years Exxon was the poster child for financial strength in the energy industry. That is no longer the case. It hasn't turned into a financial deadbeat by any stretch, but Chevron has clearly taken its place as the industry leader here. For more conservative dividend investors looking at the out-of-favor energy patch for bargains, Chevron clearly looks like the cleanest dirty shirt. Given Exxon's write off plans, that's unlikely to change anytime soon.