Technology has increasingly represented the broader market. So much so that investors might overlook energy, which remains the ultimate foundation for the world's economy. Integrated oil and natural gas giants ExxonMobil (XOM 0.51%) and Chevron (CVX 0.37%) have endured the energy industry's ups and downs for decades.
These companies explore for and refine oil and natural gas, but thrive in times of high commodity prices. ExxonMobil and Chevron have the ingredients that buy-and-hold investors look for, and the industry's dynamics could create sustained windfalls of profits for both.
Here is why spending $500 to buy shares of both companies is a stellar investment idea.
Clean balance sheets
Energy companies can be cyclical. Their earnings grow when the economy is doing well and oil and natural gas prices are high. Conversely, profits plunge during recessions and when commodity prices fall. What long-term investors would do well to prioritize is picking businesses that are financially prepared to endure downturns. Both ExxonMobil and Chevron have more cash than debt on their balance sheets. These companies, which have many billions of dollars of assets in land and equipment, are debt-free on a net basis.
XOM Cash and Short Term Investments (Quarterly) data by YCharts.
Both companies are also working to close blockbuster acquisitions. ExxonMobil is buying Pioneer Natural Resources for $59.5 billion, while Chevron is gobbling up Hess for $53 billion. Both companies are funding the deals with stock. That benefits shareholders if a deal goes through when share prices are high, as it would take fewer shares to fund the deal, thus diluting their previous investors to a lesser degree.
Using stock to swing these deals also means that the companies maintain their stellar balance sheets. Once the acquisitions close, both companies can piece out the acquisitions, selling off any assets of the companies they don't want to keep.
Tremendous money going to shareholders
ExxonMobil and Chevron are great at pumping cash into shareholders' pockets. ExxonMobil has paid and raised its dividend for 42 consecutive years, and Chevron's streak is 37 years. These dividend stocks have yields of solid 3.1% and 4%, respectively, at their current share prices. Their sparkling clean balance sheets mean that shareholders can count on those dividends to keep coming and continue rising year after year.
NYSE: XOM
Key Data Points
Additionally, the two companies are rolling out enormous share repurchase programs. ExxonMobil is ramping up to $20 billion in annual share repurchases once it closes the Pioneer acquisition, while Chevron is in the midst of a $75 billion program it announced a year ago. Share repurchases lower a company's outstanding share count, which increases its earnings per share, supporting share price appreciation.
NYSE: CVX
Key Data Points
Consider how massive these repurchase programs are. ExxonMobil's $20 billion program is equivalent to over 4% of its (pre-Pioneer deal) market cap. Chevron's $75 billion program is a quarter of its (pre-Hess deal) market cap. These repurchases are poised to drive share prices higher over the coming years.
High commodity prices could boost profits
Lastly, there are reasons to expect oil prices to stabilize at relatively high levels. Wars in Europe and the Middle East threaten to disrupt global oil supply. War has damaged Russian facilities, and oil fields are vulnerable to conflicts in the Middle East. Oil prices have held in the neighborhood of $80 per barrel since early last year, and some experts believe oil could be heading for more than $100 per barrel.
While higher commodity prices cut into refining profits, the tailwinds to upstream earnings should mean there's more good than harm done to the vertically integrated energy majors. ExxonMobil and Chevron reported record earnings in 2022 on the back of $100 per barrel prices, and further windfall profits could mean more cash flowing to their shareholders, given their clean balance sheets.
XOM Price to Book Value data by YCharts.
Both stocks are trading near their highest price-to-book values in a decade. However, disruptions on the industry's supply side, coupled with ExxonMobil and Chevron's stellar fundamentals, should give investors confidence to buy shares, as oil prices could remain elevated for some time. The stars are aligning for strong operating performance over the coming quarters.
