Chevron (CVX 4.36%) and ExxonMobil (XOM 4.69%) are often compared to one another, and for good reason: They are two of the largest integrated energy companies in the world, and they are both based out of the United States.
Right now, Exxon's stock has been outdistancing Chevron's shares. But over the long-term, dividend investors shouldn't lose faith in Chevron's future just because of one relatively short stretch of trouble.
Chevron is falling behind
Through the first five-and-half months or so of 2024, Exxon's stock price has increased by around 17%. Chevron's stock has risen less than half of that figure, at roughly 7%. Both stocks have been tracking Brent crude prices higher, but it is pretty clear that Exxon has been the bigger beneficiary of Wall Street's enthusiasm for the energy sector.
One notable reason for that has virtually nothing to do with oil prices. Chevron is working to acquire smaller peer Hess (HES +0.00%). However, the deal has run into a big problem: Exxon.
Hess and Exxon are partners on an important oil project. Exxon believes it has the right to buy Hess out of the project if Hess itself gets bought, but that would make buying Hess a lot less desirable for Chevron. This could drag the proposed deal out or, perhaps, even lead to the acquisition getting scuttled.
Interestingly enough, Exxon just bought smaller peer Pioneer Natural Resources. That deal wasn't being contested by anyone and was consummated fairly quickly. The benefit of the acquisition is that Exxon has grown its resource base while Chevron is, basically, being stymied from doing the same thing with its own energy portfolio. Investors are likely worried that Chevron's production growth will fall behind that of its most relevant peer.
The next year could be filled with headline risk for Chevron, and all of its efforts to buy Hess could, in the end, be for naught.
NYSE: CVX
Key Data Points
Chevron's future isn't a one-year story
That said, investors need to understand that Chevron doesn't really need Hess. It is already one of the largest energy companies on the planet and has ample investment opportunity within its existing portfolio.
If a year from now the Hess deal has been called off, Chevron's core strengths won't change. Yes, near-term growth could be impacted, but most shareholders should view Chevron as a long-term hold, not a short-term way to play a proposed acquisition.
In fact, given Chevron's strong balance sheet, if it doesn't buy Hess, it could pretty easily go out and find another acquisition target if it wanted to do so. To put a number on that, Chevron's debt-to-equity ratio is a tiny 0.14. That's better than all of its closest peers, including Exxon, which has a debt-to-equity ratio of around 0.2.
Those are both very strong ratios, but Chevron still has more room on the balance sheet to take on a big deal. That said, both companies tend to use stock, not debt, when making acquisitions. However, Chevron's financial strength is important in other ways as well.
CVX Debt to Equity Ratio data by YCharts
When oil prices are weak, Exxon and Chevron both tend to add leverage so they can continue to fund their operations and pay dividends. Chevron has more leeway on its balance sheet than Exxon when, not if, the next energy downturn arrives. So, despite the fact that the next year could be rocky on the Hess acquisition front, it will probably be rock solid on the business and dividend front.
Chevron is the better deal
Here's where things get a little more interesting. If you are looking at an energy stock, there's more headline risk with Chevron right now, but, even if things don't work out well on the Hess front, it won't likely change the long-term outlook for Chevron all that much.
However, dividend investors can collect a 4% yield if they buy Chevron and only a 3.2% yield from Exxon. That's a small difference on an absolute level, but a huge income increase on a percentage basis. If you are considering buying an oil company, Chevron is probably the better choice, even as it faces trouble with its Hess acquisition plans.
