This time is different. At least that's how things feel while you are in the middle of them. However, most of the time, a more appropriate saying is "this too shall pass." If you are watching the geopolitical conflict in the Middle East, ExxonMobil (XOM 0.35%) and Chevron (CVX 1.51%) are ready to deal with whatever comes their way, most notably including the eventual end of the conflict.
Oil prices are high and likely to stay high
The geopolitical conflict in the Middle East has pushed oil prices higher. However, they remain incredibly volatile as news from the region ebbs and flows. In the near term, higher oil prices are a net benefit for integrated energy giants like Exxon and Chevron. While they have exposure to the entire energy value chain, their production businesses remain important drivers of revenues and earnings.
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Notably, the conflict has caused damage to energy infrastructure that will likely take time to repair. And the bottlenecks caused can't simply be unwound overnight. So it is likely that, even in the best case scenario, Exxon and Chevron will benefit from higher energy prices for a couple of quarters, if not longer.
Oil prices will eventually come back down
If history is any guide, however, the current conflict will end, and oil prices will eventually come back down. While there's no way to know what Exxon and Chevron will do during the likely period of elevated profits, they could use the cash to pay down debt and buy back shares. In essence, they could further strengthen their already strong financial positions.
NYSE: XOM
Key Data Points
That would be particularly beneficial for Chevron, which recently completed its acquisition of Hess, a move that slightly increased its leverage. The company's debt-to-equity ratio is roughly 0.25x. Exxon's debt-to-equity ratio is already so low at roughly 0.19x that buybacks might be seen as the better choice.
NYSE: CVX
Key Data Points
Buying back stock and paying down debt would prepare both Exxon and Chevron for a future in which oil prices aren't as high. So the net outcome of the tensions in the Middle East is likely to be a net positive for both companies. That said, they both have some exposure to the region, with industry watchers estimating that Exxon's exposure is greater than Chevron's.
Still, both companies have been increasing their exposure to the onshore U.S. oil sector, which will help protect them from any lingering physical impacts in the Middle East. And, when you step back and look at the big picture, the vast majority of both companies' assets are not located in the Middle East.
Winning through the energy cycle
The big takeaway for Exxon and Chevron is that they think in decades and not days, weeks, or months. This approach has led them to build diversified businesses that are financially strong enough to survive the entire energy cycle, from high oil prices to low prices. For most investors, these two industry giants are likely to be the best options in the energy sector most of the time.
