On Feb. 2, ExxonMobil (XOM -2.78%) and Chevron (CVX 0.37%) reported their fourth-quarter and full-year 2023 results. It was the second-best year for both companies over the last decade (the best being 2022 when Brent crude oil prices averaged over $100 a barrel).
Chevron rallied just shy of 3% on its news, while Exxon fell 0.4%. Zoom out, and Exxon is up 115% over the last three years compared to 71.1% for Chevron. Here's what you need to know to determine which dividend stock is best for you.
Image source: Getty Images.
Thriving at $80 Brent
Exxon and Chevron's incredible performance in 2022 resulted from high oil prices and a supply/demand imbalance. The outsized earnings helped both companies improve their balance sheets and accelerate their investments. But it's not the kind of year investors should expect to happen under normal conditions.
In 2023, Brent crude oil prices averaged a much lower $82 per barrel. And yet, Exxon and Chevron still generated gobs of operating cash flow that they used to support their operations, capital expenditures, and long-term investments, and to return cash to shareholders through dividends and buybacks. But is $80 Brent a reasonable expectation in the years to come?
The U.S. Energy Information Administration (EIA) expects crude oil prices to flatten over the next two years:
We forecast average annual crude oil prices in 2024 and 2025 will remain near their 2023 average because we expect that global supply and demand for petroleum liquids will be relatively balanced over the next two years. We expect the Brent crude oil price will average $82 per barrel (b) in 2024 and $79/b in 2025, compared with its 2023 average of $82/b. We expect that the price of West Texas Intermediate will be slightly lower but generally follow the same path.
I take the EIA's predictions with a grain of salt because unforeseen market conditions and geopolitical tensions can derail even the best forecasters. But if the prediction comes true, it would be music to the ears of Exxon and Chevron. At the very least, it provides a green light to boost production, which is exactly what both companies are doing through their organic growth as well as acquisitions.
Exxon plans to close its $59.5 billion acquisition of Pioneer Natural Resources in Q2, significantly boosting its Permian Basin production. Chevron's $53 billion acquisition of Hess is expected to close later this year as well and will boost Chevron's international production, namely offshore Guyana.
2023 proved that both companies can thrive at $80 Brent. Exxon earned $36.1 billion in free cash flow (FCF), paid $14.9 in dividends, bought back $17.4 billion in stock, and lowered its debt position from $40.6 billion to $37.5 billion. Similarly, Chevron earned $19.8 billion in FCF, paid $11.3 billion in dividends, bought back $14.9 billion in stock, and lowered its debt from $23.3 billion to $20.8 billion. Chevron did tap into some of its cash reserves on the balance sheet to fund its capital-return program, but that's perfectly fine given it still has $8.2 billion in cash and relatively low debt.
Two massive capital-return programs
Exxon spent 7.6% more on buybacks and dividends in 2023 than it did in 2022. But Chevron boosted its capital return program by 17.9% in 2023, including a whopping 31.9% increase in buybacks. As a ratio of capital returns to buybacks, ExxonMobil's $32.4 billion represents 8% of its market cap, while Chevron's $26.3 billion is 9.3% of its market cap. In other words, if both companies did zero buybacks and used all the money on dividends, Exxon would yield 8%, and Chevron would yield 9.3%.
This, of course, is purely hypothetical. But it shows that Chevron is executing a relatively higher capital-return program than Exxon.
Growing dividends
Not only is Chevron supporting a higher capital-return program than Exxon, but it is also raising its dividend more rapidly.
CVX Dividend data by YCharts.
As you can see in the chart, Chevron has increased its dividend at more than double the rate of Exxon over the last five years.
In Q4, Exxon raised its dividend from $0.91 a share to $0.95 a share, marking the 41st consecutive annual increase. On Feb. 2, Chevron announced an 8% dividend raise, marking the 37th consecutive annual increase.
Factoring in the forward dividend of $6.52 a share for Chevron and $3.80 a share for Exxon, Chevron yields 4.3% compared to 3.7% for Exxon.
Two top-tier oil stocks to buy now
Chevron's record year of capital returns and Exxon's industry-leading earnings make both stocks attractive right now. Chevron's Hess acquisition will allow it to join Exxon drilling offshore Guyana. Both companies have diversified upstream portfolios and thriving downstream businesses too.
I used to like Chevron more than Exxon, mainly because Exxon was spending aggressively while operating a leveraged balance sheet. But now that the leverage has come down, I view both companies on a more equal footing.
Chevron stands out as the more conservative pick. I don't expect it to be as aggressive as Exxon. Chevron CEO Mike Wirth has an excellent track record for staying disciplined when it's tempting to overly expand. It is growing its dividend at a faster rate than Exxon, which I expect to continue. And Chevron has the higher yield.
Meanwhile, Exxon has a slightly better upstream portfolio, mainly because it is already producing offshore Guyana, and its Permian position is elevated from Pioneer's low production cost and premium acreage. I also expect Exxon to be more aggressive with its spending. Although it is a little riskier than Chevron, it's still a well-run diversified company. And because the balance sheet is in such good shape, Exxon isn't nearly as vulnerable as it used to be.
The price-to-earnings ratios are also a toss-up, with Chevron at 13.4 compared to Exxon's 11.5. For most investors, buying a 50/50 split of both stocks is probably the best move. But if you're only choosing one, it will come down to preference based on the factors discussed.
