If you are looking for an energy stock to add to your portfolio in 2023, you've probably got industry giants ExxonMobil (XOM -2.78%) and Chevron (CVX 0.37%) on your shortlist. That makes complete sense, but which one is a better investment option?
Let's explore this question further because there are some important subtleties to consider here.
The basic businesses of both are similar
Both ExxonMobil and Chevron are U.S.-based companies with globally diversified portfolios. They are classified as integrated energy majors because of their size and the fact that they have exposure to the upstream (energy drilling), midstream (pipelines), and downstream (refining and chemicals) segments of the industry. The benefit of this is that the different segments of the industry perform differently when oil prices move around. For example, upstream profits fall when oil declines, but that is often a benefit for downstream businesses, which use oil as a key input.
Image source: Getty Images.
Although neither one of the companies really "wins" on this point, Chevron has historically been a bit more exposed to the upstream segment. In a volatile energy sector, that could be an important nuance to consider.
Both show financial strength and enviable debt ratios
ExxonMobil's market cap is around $440 billion, while Chevron weighs in at roughly $340 billion. ExxonMobil is notably bigger, but both are huge and big enough that financial institutions are happy to work with them. Both of their balance sheets are investment grade rated, as well. This has historically allowed them to take on debt during periods of weak oil prices in order to support dividend payments (more on this in a second) and capital spending plans.
CVX Financial Debt to Equity (Quarterly) data by YCharts
That said, recently Chevron has been a little more cautious with its debt-to-equity ratio, which sits at a very low 0.085 times. ExxonMobil's ratio is very strong at 0.124 times, but it is ever so slightly higher. For ultra-conservative types, that might be an important distinction. Meanwhile, both are well below the rates of their closest peers in Europe.
ExxonMobil has a slight advantage on dividends
ExxonMobil has increased its dividend annually for an incredible 40 years. Chevron has hiked its payout each year for 35 years running. Given the highly cyclical nature of the energy sector, these are impressive streaks that show an immense commitment to returning cash to shareholders.
ExxonMobil's dividend yield is around 3.3% today. Chevron's yield is roughly 3.1%. Those are fairly attractive numbers compared to the broader market, given that stocks in the S&P 500 index have an average yield of around 1.7%. That said, both ExxonMobil and Chevron have seen material price gains since their 2020 lows, when oil prices plunged on demand declines related to the efforts being used to slow the spread of the coronavirus (social distancing and non-essential business closures). So the yields today are much less generous than they were a few years ago (and neither of these stocks looks particularly "cheap" right now).
For investors looking to maximize the current income they generate, ExxonMobil clearly has an advantage.
The future is not yet clean-energy focused
Both ExxonMobil and Chevron are in an industry that requires constant capital investment since wells generally produce less oil over time and eventually run dry. They each have slightly different investment plans, but neither is particularly underspending. That said, neither company is particularly focused on clean energy investing either, preferring to stick close to their core oil and natural gas specialities. For those with a heavy ESG focus, that could very well push both companies out of consideration given that European peers like TotalEnergies and Shell have been much more aggressive on the clean energy front. It's probably best to think of ExxonMobil and Chevron as dipping their toes in the water while some peers have jumped in with both feet.
A coin flip?
After reading this, you might feel like the choice between ExxonMobil or Chevron could be decided by tossing a coin. In some ways that is actually true, since they are far more similar than they are dissimilar. But, with a higher yield and a slightly more diversified business, ExxonMobil might be the best option for income investors looking to maximize their income while minimizing risk. Conversely, Chevron could be a good choice if you want to be exposed just a bit more to energy price moves. The differences are, indeed, subtle, but nuance can matter when you add a new stock to your portfolio.
