If you are interested in adding some energy industry exposure to your portfolio, you should start by looking at integrated energy giants like ExxonMobil (XOM 0.02%) and Chevron (CVX 0.44%). In some ways, the two investments are almost interchangeable, but they aren't in other important ways. Here's why long-term investors might choose one over the other.
1. Dividend commitment
ExxonMobil has increased its dividend annually for roughly four decades. Chevron's payout boosting streak has run for about 35 years or so. Both dividend-growth runs are still alive, despite the deep oil price slump in 2020 as the coronavirus pandemic led to a decline in demand. The thing is, energy is a highly cyclical industry, so up cycles and down cycles, often swift and steep, are not unusual. That makes it even more impressive that these two companies have been able to keep their dividends growing steadily for so long.
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Both are Dividend Aristocrats, and a company doesn't achieve that title by accident. Such businesses are generally very well run over long periods. Both have clearly proven their dividend bona fides.
2. Dividend yield
ExxonMobil's dividend yield is around 4.2% at today's share prices, while Chevron's yield is around 3.4%. So for investors looking to maximize current income, ExxonMobil seems the better option. And that may be true -- so long as they don't mind taking on some added risks.
3. The core business
Both of these energy sector giants have broadly diversified businesses, with assets that span from the upstream (drilling) to the downstream (refining and chemicals) segments. That diversification helps soften the blow of the industry's swings, since downstream businesses tend to benefit when oil prices are low while upstream businesses prosper when they're high. That said, these companies can't eliminate the impact of the industry's inherent cyclicality since oil and natural gas prices drive their results.
Chevron's business tends to be more tied to energy prices because it is more focused on the upstream than ExxonMobil, which means its bottom line and share price are more sensitive to commodity prices. That, in part, helps explain the San Ramon, CA-based company's lower dividend yield today, given the rally in oil prices. This could give Chevron an edge for investors looking specifically for more raw commodity exposure.
4. Balance sheet
Both Chevron and ExxonMobil have industry-leading balance sheets. ExxonMobil's debt-to-equity ratio is a modest 0.27, while Chevron's is an even more conservative 0.22. Both of these numbers are off the peaks they hit during the pandemic downturn, when the companies used the strength of their balance sheets to get access to the cash they needed to run their businesses and pay dividends while energy prices were weak. Their current levels are a testament to each of their dividend commitments, financial strength, and ability to weather hard times. That said, Chevron has a slightly better number.
5. A look at the future
So far, these two companies appear very similar as investments. But there is a notable difference that investors need to consider. Going into the 2020 downturn, ExxonMobil had fallen behind its peers on the production front and was looking to execute a huge investment program. Chevron, on the other hand, was benefiting from prior investments and didn't need as much capital spending to keep growing. When the pandemic hit, demand slumped, and oil prices fell, companies throughout the industry pulled back on spending. Given ExxonMobil's greater need to put more capital to work, it is at a disadvantage in an environment that places more focus on thrift. Even with energy prices rebounding strongly, it is still planning to restrain its investments compared to previous targets. So spending versus production remains an issue that has to be watched closely.
Chevron's better positioning going into the pandemic has had other benefits. For example, during the downturn it bought smaller peer Noble Energy, strengthening its position. And, more recently, it agreed to buy biofuel maker Renewable Energy Group (REGI), which will help to improve Chevron's clean energy credentials. ExxonMobil hasn't made these types of moves, likely because it has been more focused on finding ways to fund investments in its core business. Basically, Chevron looks like it's in a more flexible position today, which is likely the other big reason why investors appear to be affording it a premium price compared to ExxonMobil. For example, Chevron's shares are trading at 20 times trailing-twelve-month earnings, while ExxonMobil trades at 15 times.
The better option
ExxonMobil is not a bad company, and investors looking for an energy play and a high yield would be fine buying it. That said, the company appears to have more work ahead of it as it tries to prepare for the future of the energy sector, including getting its own production back on a more solid trajectory and shifting toward a cleaner future.
On the other hand, Chevron looks better positioned across the board, which means its dividend is likely a bit safer over the long term. Investors know this, and have rewarded it with a premium price. Still, for more conservative investors looking at the energy sector during an industry upswing, and recognizing the broader shift toward clean energy, it's probably worth paying that premium.
