Oil prices were starting to strengthen as 2020 drew to a close. Still, both ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) were probably glad to see the year come to an end -- the improvement in oil prices came off a very low base given the pandemic headwinds the energy sector faced.
Investors looking at these U.S. energy giants today might be wondering which is better positioned to ride a recovery. Here's what you need to know.
In the headlines
While the price of oil and natural gas are clearly the most important things driving top- and bottom-line performance at Exxon and Chevron, there's another issue that's increasingly taking center stage: The global push to reduce carbon emissions is leading to very public problems in the political and management realms, at least for Exxon.
The company has been the subject of a lawsuit in New York claiming that it defrauded investors by hiding climate change costs. It eventually won that case in late 2019, but the problems aren't over -- it's now being investigated by the SEC, which is looking into the way it values its assets. That's an issue that has dogged the company for a while, since it historically hasn't written down asset values as aggressively as its peers. At the same time, dissident shareholders are trying to get the company to more aggressively change the way it operates. Basically, because of its prominence in the energy industry, Exxon has a target on its back.
Chevron isn't immune to these same threats, but it doesn't garner the same level of attention, either. Headline risk is likely to be an increasingly important issue for these oil giants, since, unlike their European peers, Exxon and Chevron haven't laid out dramatic plans for a cleaner future. But it looks like Exxon is going to take the most heat.
Part of the reason for that is Exxon's size and prominence in the sector -- it carries a market cap of around $200 billion, making it one of the largest energy companies on Earth, and has a long and storied history dating back to the 1800s and the fabled Standard Oil Company. But Chevron is hardly an industry newcomer, weighing in with a market cap of around $180 billion. Like Exxon, it has a diversified business that spans from the upstream (exploration and production) to the downstream (chemicals and refining) segments of the industry, and a global footprint. Put another way, it can stand toe-to-toe with Exxon as a company.
That includes the dividend front, where Exxon's 37-year streak of annual increases is better, but Chevron's 33-year streak is a very close second. Meanwhile, both oil giants stress the importance of supporting their dividends, even if times are tough today.
All in all, when you look at size, diversification, and dividend history, there's not much difference between these two companies. That said, Exxon's 7.2% dividend yield is much more generous than Chevron's 5.6% right now.
A big problem
That brings up another notable issue for Exxon, though, and explains why more conservative investors will probably prefer Chevron: capital spending. Before the pandemic downturn, Exxon was embarking on a massive capital investment program to reverse the production declines it was suffering from. This wasn't really an optional effort -- the company needed to make notable investments in production if it wanted to sustain or grow its business. It was expected to be costly and put material stress on the company's ability to keep growing its dividend. And then the coronavirus upended things, and pushed oil and natural gas prices to painful lows.
Like just about every company in the energy sector, Exxon pulled back on spending. But the need to spend didn't go away -- the cost is just being pushed out into the future. In the meantime, production becomes an even bigger near-term concern. Chevron entered the downturn in better shape, as it was benefiting from previous spending. Its need to spend now isn't as great. This difference shows up most prominently on the two companies' balance sheets.
At the start of 2019 Chevron's debt to equity ratio was higher than Exxon's. By the third quarter of 2020, however, Exxon's debt to equity ratio had doubled, while Chevron's had increased by a modest 20% or so. To be fair, Exxon's ratio is a still-reasonable 0.4 times, but Chevron's finances are in much better shape given its debt to equity ratio of roughly 0.25 times. That suggests that Chevron will have an easier time muddling through the current industry malaise and sustaining its dividend. It's even inked a major acquisition, which will likely push the debt to equity ratio higher, but for a good reason: The deal will strengthen its industry position. In fact, during Chevron's third-quarter 2020 earnings conference call, management noted that its breakeven point was below $50 per barrel -- suggesting that investors don't need to worry quite as much about its dividend, since that's about where oil is today. Exxon is just not in as good a position.
The "better" choice
Exxon is a well run energy company and investors wouldn't be making a bad decision if they bought it. There is material recovery potential in the stock, assuming oil prices mount a sustained recovery. However, right now that looks like a big "if", and the headwinds facing the company are likely to continue for a while. More conservative dividend investors will probably be better off taking the lower yield on offer from Chevron, which looks better positioned to handle the current headwinds.