Within the energy sector, there are many stocks to choose from that, at first glance, seem extremely similar. However, the giants of the energy field, including ExxonMobil (XOM 1.42%), Chevron (CVX 1.44%), and ConocoPhillips (COP 3.38%), aren't created equal, with each offering subtle differences in their operations and shareholder policies.
Big Oil is big business, so not surprisingly, there's more than enough profits to go around, making each of these great companies worthy of investment in their own right. At the same time, investors should consider the following to determine which stock is the best fit.
Differing paths ahead
Perhaps the most glaring difference in how each of these companies will proceed in the years ahead pertains to the fossil fuels they're targeting for development and production. For instance, ExxonMobil plowed head-first into natural gas, which unfortunately, hasn't worked out as the company had hoped. As you may recall, ExxonMobil paid $41 billion to acquire XTO Energy in 2009.
At the time, XTO was the nation's largest holder of natural gas reserves, but since natural gas prices have declined significantly since the acquisition, the move looks ill-advised in hindsight. ExxonMobil readily admitted this itself; earlier this year, Chief Executive Officer Rex Tillerson told shareholders at the company's annual meeting that, while the deal still makes sense from a strategic perspective, the timing was poor. He further conceded that ExxonMobil would have been better served waiting a year or two to make the acquisition. This was a major factor behind ExxonMobil's 57% drop in net income in the second quarter.
Like Exxon, Chevron is also betting heavily on natural gas, although not to the extent of its rival. Chevron produced 5.07 billion cubic feet of natural gas per day in 2012, and will increase production exponentially over the next decade. That, in addition to underwhelming results from its refining operations, caused the company's second-quarter profit to fall by 26%.
ConocoPhillips, meanwhile, has focused itself after spinning off its refining business. Moreover, the company has not invested nearly as much as ExxonMobil into natural gas. As a result, its traditional oil exploration and production activities have allowed it to avoid the disappointing results that Exxon and Chevron are struggling with. Consider that Conoco grew its production to 1,510 million barrels of oil equivalents per day in the second quarter, representing a year-over-year increase and cause for the company to up its full-year production guidance.
Contrasting shareholder policies
ExxonMobil, Chevron, and ConocoPhillips each reward their shareholders handsomely through a combination of share buybacks and dividends, but they each employ a different mix to achieve their desired results.
ExxonMobil holds the lowest dividend payout of the three, offering a 2.9% payout at recent prices. Its preferred method of returning capital to shareholders has traditionally been share repurchases. Exxon repurchased $5.6 billion worth of its own shares in the first quarter, and before then, had bought back at least $5 billion of its own stock for ten consecutive quarters. Looking further back, Exxon has repurchased $207 billion of stock over the past ten years, more than the entire market values of all but 11 members of the S&P 500.
ConocoPhillips offers the highest yield of the three, at 4% annualized, which is ideal for investors who need current income. It's worth noting that the company's dividend growth lags Exxon's and Chevron's, but investors who need income now—such as those in or nearing retirement—should give due consideration to ConocoPhillips and its hefty 4% yield.
Meanwhile, Chevron may offer the best mix of yield, dividend growth, and share buybacks. Chevron repurchased $1.25 billion of its own shares during the first and second quarter of 2013. As far as its dividend is concerned, it offers a juicy 3.3% yield and has increased its dividend by 9% compounded annually over the past five years.
The Foolish bottom line
ExxonMobil, Chevron, and ConocoPhillips are all massively profitable and very likely to earn strong returns for many years. None of them are bad stocks by any means, but at the same time, investors should decide what's most important to them before jumping in.
ExxonMobil has made a massive bet on natural gas, and is likely not the best choice for investors who need current income, due to its modest dividend yield. ConocoPhillips, meanwhile, sports a much higher yield than its two rivals, at 4%. In addition, its operations are much more streamlined than its industry peers, which is paying off in the current environment, but of course may reverse in the years ahead should the natural gas or refining environments become more favorable. Chevron, meanwhile, may represent the 'Goldilocks' of the three, offering a diverse business mix and 3.3% yield. No matter your investing preferences, there's an energy giant for you.
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