ExxonMobil (NYSE:XOM) is no longer a spring chicken. The world's largest publicly traded oil company has been struggling to increase output for some time now as it has become harder and harder to find new low-cost oil reserves.
The company is now set for a period of even slower output growth as it cuts spending and seeks stability over growth. At the same time, ExxonMobil's smaller peer Chevron (NYSE:CVX) is springing into action, ramping up project development, output, and as a result, earnings.
With this being the case, ExxonMobil now appears overvalued.
While ExxonMobil trades at a historic P/E of 13.9 compared to Chevron's 12.7, Exxon's investors are unlikely to see much in the way of earnings growth over the next few years. Traditionally, investors pay a premium for growth.
Two different strategies
For the next few years, Chevron and ExxonMobil are set to pursue two different strategies. Exxon is aiming for stability while Chevron is driving for growth.
Nowhere is this divergence in strategy more obvious than in the two behemoths capital and exploration spending budgets. For example, Chevron is planning to invest $40 billion per annum through 2016, around 5% less than the budget reported for 2013. Meanwhile, ExxonMobil is slashing spending from $42.5 billion last year to $40 billion this year and less than $37 billion through 2017.
Of course, these spending patterns will impact output. ExxonMobil's output currently stands at around 4.2 million barrels of oil equivalent per day (boe/d), slated to hit 4.3 million boe/d by 2017. Chevron's current production is 2.6 million boe/d, but this is expected to jump around 20% to approximately 3 million boe/d by 2017.
Discounting oil price fluctuations and buybacks, Chevrons earnings should be set to rise 20% over the next three years as production comes onstream. Exxon's earnings will hardly move as production stagnates.
Nevertheless, Exxon is aggressively buying back stock in order to drive up earnings per share (and the company's share price). Excluding the price of oil, which is an unknown and incalculable variable, buybacks are likely to be Exxon's main earnings catalyst going forward.
During 2013, Exxon swallowed just under $16 billion of its own shares, eclipsing Chevron's total buyback of $4.5 billion. In share terms, Exxon's buybacks took 123 million shares off of the market, equaling 2.7% of the shares in issue at the beginning of 2013. This buyback failed to stop a 24% slump in year-on-year earnings per share, although it did soften the blow as net income dropped 27%.
This trend is likely to continue, too, unless the price of oil embarks on a long sustained rally. The only real catalyst for Exxon's earnings going forward will be buybacks.
The bottom line
Over the next few years, ExxonMobil's earnings are unlikely to surge higher. As the company seeks stability by reducing capital spending, output is unlikely to grow; this implies that the company's main earnings catalyst going forward will be stock buybacks.
Chevron, on the other hand, is set for rapid earnings growth as the company's production surges over the next few years.