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Exxon Mobil (XOM) and Chevron (CVX) are the only Dividend Aristocrats in the oil industry, with 39 and 35 consecutive years of dividend growth, respectively. Both oil giants came under great pressure in 2020 due to the pandemic but they are thriving right now thanks to the strong recovery of the energy market and the sanctions of western countries on Russia, which have sent the prices of oil and gas to 13-year highs. The big question is which of the two oil majors is more attractive right now.
 

Business Overview

Exxon and Chevron enjoy an ideal business environment right now. Russia produces 10% of global oil output and hence the sanctions of western countries on Russia for its invasion of Ukraine have greatly tightened the oil market. Russia has reduced its production by 10% since the onset of the war but it is expected to reduce its output even more in the near future. As a result, the price of oil has rallied to a 13-year high lately.

A similar situation is evident in the natural gas market as well. Europe, which generates 31% of its electricity from natural gas provided by Russia, is trying to shift away from Russia. It has thus begun to import LNG cargos from the U.S. aggressively and hence the U.S. natural gas market has become extremely tight. This development has sent the price of U.S. natural gas to a 13-year high.

Both Exxon and Chevron are poised to report 10-year high earnings per share this year thanks to the above tailwinds. However, Chevron is somewhat more leveraged to the prices of oil and gas and hence it benefits more from its multi-year high prices.

Since 2018, Chevron has generated approximately 80% of its earnings from its upstream segment. On the other hand, Exxon is well-known for its more diversified, integrated structure. In 2021, it generated 62% of its earnings from its upstream segment while it generated the remaining 38% of its earnings from its downstream and chemical divisions. These two divisions have always provided a strong buffer to the results of Exxon during downturns but they somewhat reduce the upside potential of the oil giant during boom times. Overall, Chevron is more leveraged than Exxon to rally the prices of oil and gas. This helps explain why analysts expect Chevron to double its earnings per share this year whereas they expect Exxon to grow its earnings per share by 86%.

The difference would have been greater but Exxon also benefits from the impact of the war on the Russian production of refined products, which has led refining margins to skyrocket. As a result, both the upstream and the downstream segments of Exxon thrive right now. To cut a long story short, Chevron benefits more than Exxon during boom times but the current conditions in the energy market are so favorable that the difference between the two oil majors is small.
 

Growth Prospects

Most oil majors have consistently grown their production over the last five years, with the exception of Exxon and Shell (SHEL). In fact, Exxon is the only oil major that has failed to grow its production since 2008. This is certainly disappointing, as the company has relied almost fully on the cyclical commodity prices to generate growth since 2008.

On the bright side, its projects offshore Guyana and in the Permian Basin are among the most promising growth projects in the entire oil industry. Thanks to a long series of discoveries, Exxon has more than tripled its reserves in Guyana, from 3.2 billion barrels in early 2018 to about 11.0 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 changed its strategy during the pandemic and decided to postpone or cancel some major growth projects, such as its $30 billion LNG export project in Mozambique, in order to fund its dividend and reduce its debt load. 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 production for at least another four years.

Chevron has a much better growth record than Exxon. It grew its output by 5% per year on average in 2017-2019. Even in 2020, when most oil producers cut their production due to the pandemic, Chevron grew its output by 1%, assisted by its acquisition of Noble Energy, which enhanced the presence of Chevron in the Permian Basin. Chevron expects to keep growing its production thanks to its promising pipeline of projects in the Permian Basin and in Australia. Therefore, Chevron has a better performance record than Exxon and has more promising growth prospects ahead.
 

Dividend

As mentioned above, Exxon and Chevron are the only two Dividend Aristocrats in the oil industry. However, due to the steep rally of both stocks in the last 12 months, their dividend yields have remarkably decreased, though they remain far above the 1.4% yield of the S&P 500.

Exxon is offering a 4.2% dividend yield, which is higher than the 3.5% dividend yield of Chevron. However, there are good reasons behind the superior dividend yield that Exxon has offered compared to Chevron for several years in a row.

First of all, as already mentioned, Chevron has exhibited a much better growth record than Exxon while it still has more promising growth potential in place. Moreover, Chevron has grown its dividend at a 5% average annual rate over the last five years whereas Exxon has grown its dividend by only 3% per year on average during this period.

Furthermore, the dividend of Chevron has a wider margin of safety. While both companies currently cover their dividends with an exceptionally wide margin, the dividend of Exxon came under pressure in 2020 due to the pandemic and the oil giant froze its dividend for 10 consecutive quarters. This helps explain why many analysts questioned the safety of the dividend of Exxon in 2020 whereas no one questioned the safety of the dividend of Chevron. Overall, Exxon is offering a higher dividend yield than Chevron but its dividend will probably be somewhat more vulnerable whenever the next downturn in the energy sector shows up.
 

Final Thoughts

Exxon is offering a higher dividend yield than Chevron but it has much less promising growth prospects. Therefore, Chevron appears to be more attractive. Nevertheless, as long as the prices of oil and gas remain excessive, both oil majors will keep thriving, with small differences in their performance.