The world is in the middle of a major energy transition as it looks to reduce the use of carbon fuels like oil and natural gas. However, this is likely to be a slow-moving shift given the massive scale of this undertaking. And that means that more aggressive investors can still find opportunity in the oil patch -- though sticking with the biggest, most diversified, and strongest names is probably a good call.
1. Notable Similarities
Although Exxon and Chevron are not exactly interchangeable, they are very similar. Both have large upstream (drilling), midstream (pipeline), and downstream (chemicals and refining) operations. They also have massive reach and global portfolios, despite being based out of the United States, which is one of the biggest energy producers in the world. On the drilling side, they each have offshore and onshore exposure. In other words, they are both one-stop investments for those seeking exposure to the global energy sector.
What differentiates them is the nuances -- which end up being very important today given the shifting market environment in which they operate.
2. Dividend differences
Exxon's yield is 6% today. Chevron's dividend yield is 5.3%. Exxon has increased its dividend annually for 38 consecutive years, while Chevron is a few years behind at 34 (at present they are both Dividend Aristocrats). Historically, both have grown dividends annually at a pace in the mid-single-digits.
Before you give Exxon the edge, though, it hasn't increased its quarterly dividend since the second quarter of 2019. If it doesn't up the payout in the fourth quarter this year, the dividend streak noted above will end.
Chevron increased its dividend in 2020 and in 2021. This speaks to a company that is in a better financial and industry position, which will be looked at more closely below. But the key takeaway is that the extra yield from Exxon comes with extra risks, and may not be the best option for more conservative income-focused investors.
3. Growing or stumbling
To be fair, both Chevron and Exxon are well run companies with impressive records of operating their assets well. However, business goes in cycles, and right now Chevron is simply performing better. Leading into the 2020 industry downturn precipitated by the coronavirus pandemic, Chevron was coming off of a spending period, while Exxon was just getting set to ramp up its investment plans. Thus, Exxon got hit harder than Chevron when energy companies were forced to pull back because it needed to spend more money to keep its production from falling. Chevron was at a point where it was benefiting from past spending.
Although oil prices have recovered from their worst levels, this dynamic remains in place. Chevron's spending needs are simply more modest than Exxon's, and thus are likely to be more manageable.
4. The foundation
Highlighting this difference is the fact that Chevron and Exxon have basically switched places when it comes to balance sheet strength. Energy companies used debt to muddle through the downturn. But because Chevron's needs were more modest, it came out the other side in stronger financial shape. To put a simple number on that, Chevron's debt-to-equity ratio is roughly 0.33 times, compared to Exxon's 0.38 times. While those are roughly similar figures, the important piece of the story is that it is a reversal of the recent historical trend, again suggesting that Exxon is in a weaker position than Chevron today.
It's also worth noting that while Exxon was basically battening down the hatches during the pandemic, Chevron made an opportunistic acquisition to ensure it came out the other side a stronger company. That speaks to the different industry positions here, and highlights that Chevron is, indeed, the stronger business right now.
5. The long-term future
Both Chevron and Exxon have largely decided to stick to their knitting in the oil and natural gas space, preferring to tiptoe into the clean energy area. They have both been under pressure from investors to act more quickly. While they're responding to these requests, neither is acting to the same degree as their European peers. That might put off some investors. However, given the relative strength of Chevron today, it appears in a better position to change than Exxon.
Exxon wound up losing a board battle with a dissident shareholder that was effectively all about the company's clean energy plans. Chevron, without a similar fight, has announced plans to triple its investment in clean energy. That's still a modest investment overall compared to what it will spend in the oil space, but avoiding the fight that Exxon took on is a statement that investors should monitor. It suggests that Chevron is more willing to adjust with the times than its peer, which should be looked on favorably right now. Exxon is upping its clean energy plans too, but it took a lot more effort to get management to budge, which isn't as good a look as the world changes around these two energy giants.
In fairness, Exxon was likely targeted for the board fight because of its name recognition. But that doesn't change the visual outcome here, which ends up favoring Chevron.
It's close, but there is a winner
When you add it all up, unless you are only concerned with buying the stock with the highest yield, Chevron continues to look like it is better positioned than Exxon. Sure, you'll have to accept a slightly lower dividend yield, but the financial strength, dividend growth, and positioning of the business are probably worth a premium price tag.