Oil stocks have been on a roller coaster since the onset of the pandemic early last year. Due to the unprecedented social distancing measures imposed last year, global oil consumption collapsed and thus all the oil majors incurred material losses.

On the other hand, thanks to the ongoing recovery of global oil consumption, which has resulted from the massive vaccine rollout, and the tight supply from OPEC and Russia, the price of oil has rallied to 7-year highs this year.

As a result, Exxon Mobil (XOM) and Chevron (CVX) are on track to post 7-year high earnings per share this year. Nevertheless, due to the dramatic cyclicality of the energy sector, investors should be especially careful in their stock selections in this sector. In this article, we will compare the prospects of Exxon Mobil and Chevron.

Business Overview

Exxon Mobil is the largest oil and gas company in the world, with a market capitalization of $261 billion. It produces oil and natural gas at a 60/40 ratio and it is one of the most integrated oil majors, with significant contribution from its refining and chemicals segments.

Thanks to its integrated business model, Exxon used to be the most defensive oil major to recessions. However, the pandemic caused a slump in the global demand for refined products and chemicals last year and thus created a perfect storm for Exxon; hefty upstream losses and multi-year low margins in the refining and chemicals segments. As a result, the oil giant incurred its first loss in more than a decade last year.

However, thanks to the tight supply from OPEC+ and the massive distribution of vaccines, which has led to a surge in global oil consumption, the price of oil has rallied to 7-year highs this year. The benefit from this tailwind was evident in the latest earnings report of the oil major. In the third quarter, its production in the Permian grew 30% over last year’s quarter but its total production remained flat. Nevertheless, thanks to the rally of the oil price, the company switched from a loss per share of -$0.18 to a 5-year high profit per share of $1.58.

Chevron is the third-largest oil major in the world based on its market capitalization of $224 billion, behind only Exxon and Royal Dutch Shell (RDS-B). In both 2018 and 2019, Chevron generated 78% of its earnings from its upstream segment, but this segment incurred losses last year due to the pandemic. While most oil majors produce crude oil and natural gas at approximately equal ratios, Chevron is more leveraged to the oil price, with a 61/39 production ratio. Moreover, as it prices a portion of its natural gas volumes based on the oil price, about 75% of its total output is priced based on the oil price. As a result, Chevron is more sensitive to the price of oil than its peers.

Due to its high sensitivity, Chevron used to be more vulnerable to recessions than its peers. However, the company has drastically improved its asset portfolio in the last five years, with the investment in low-cost, high-margin barrels and the divestment of low-return assets. As a result, Chevron posted free cash flows of $5.6 billion last year, despite the severe downturn caused by the pandemic.

Moreover, Chevron has greatly benefited from the rally of the oil price this year. In the most recent quarter, the oil major grew its production 7% over last year’s quarter and its average realized oil price essentially doubled. As a result, the company grew its earnings per share from $0.18 to an 8-year high of $2.96 and posted record free cash flow of $7.1 billion, which enabled the company to reduce its debt by $5.6 billion.

The merits of the high-grading of the asset portfolio of Chevron were evident in its latest report. The oil major achieved 8-year high earnings per share, even though the price of oil was around $100 in 2012-2014. In other words, the oil major has become much more profitable at a given oil price.

Growth Prospects

Exxon is the only oil major that has failed to grow its production since 2008. Its projects offshore Guyana and in the Permian Basin are among the most exciting projects in the entire oil industry. Exxon has nearly tripled its reserves in Guyana, from 3.2 billion barrels in early 2018 to over 9.0 billion barrels now. It also expects to grow its output in the Permian Basin, from 400,000 barrels per day this year to 700,000 barrels per day in 2025.

However, Exxon has indefinitely postponed other growth projects, such as its $30 billion LNG export project in Mozambique, in order to fund its generous dividend and strengthen its balance sheet. Consequently, the natural decline of its fields will offset the additional volumes from its two major growth projects and hence the company expects to maintain flat output for at least another four years.

On the contrary, Chevron has been growing its production consistently in recent years. It grew its production by 5% per year on average in 2017-2019. Even in 2020, when most oil producers curtailed their production due to the pandemic, Chevron grew its output 1%, assisted by its acquisition of Noble Energy, which enhanced the presence of Chevron in the Permian Basin.

Moreover, Chevron has outperformed its peers by a wide margin in the replenishment of its reserves. During the last five years, Chevron has posted a reserve replacement ratio of 99%, which is much higher than the average metric of its peers, whose reserves have declined in recent years due to asset sales and the natural decline of their fields. The superior reserve replacement of Chevron bodes well for its growth prospects. To cut a long story short, Chevron has a much better growth record and more promising growth prospects than Exxon.

Dividend

Exxon and Chevron are the only two Dividend Aristocrats in the oil industry, with 38 and 34 consecutive years of dividend growth, respectively.

Exxon is offering a 5.7% dividend yield, which is higher than the 4.6% dividend yield of Chevron. However, it is important to note that there are good reasons behind the superior dividend yield that Exxon has offered compared to Chevron in recent years. First of all, Chevron has grown its production meaningfully in recent years whereas Exxon has stalled. In addition, the former has more promising growth potential than the latter. Moreover, Chevron has a healthier payout ratio (62% vs. 70%) and enjoys higher free cash flows than Exxon. This helps explain why many analysts questioned the safety of the dividend of Exxon amid the pandemic last year whereas the dividend of Chevron was considered safe. Overall, Exxon is offering a higher dividend yield than Chevron but the dividend of the latter has a wider margin of safety.

Final Thoughts

Exxon has the longest dividend growth streak among oil stocks and is offering a 5.7% dividend yield, which is higher than the 4.6% yield of Chevron. However, there are good reasons behind the difference in the yields of the two oil giants. The stock of Chevron is more expensive due to the superior asset portfolio of the company and its more promising growth prospects. Therefore, while Chevron is offering a lower dividend yield, its stock seems more attractive than Exxon right now.