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XOM vs. CVX: Which Oil Supermajor Can Get Out of Hold Zone?

Nilanjan Choudhury
SYNH vs. FCHS: Which Stock Is the Better Value Option?

Exxon Mobil CorporationXOM and Chevron Corporation CVX – with their massive market capitalizations of $348 billion and $248 billion, respectively – dominate and define the U.S. energy industry.

Both these companies are engaged in the exploration and production of oil and natural gas, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses.

While Exxon Mobil and Chevron each carry a Zacks Rank #3 (Hold), this may be a good time to consider which of these is a better stock now and can move out of the ‘Hold’ zone and into the ‘Buy’ territory.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stock Performance

In terms of price performance, Chevron is a clear winner. Chevron has gained 26.2% over the last one year, outperforming the broader industry which has gained 23.4% over the same period. In comparison, Exxon Mobil has gained a paltry 3.9% over the same period and is well behind both Chevron and the broader industry.

Earnings History

Riding on oil price recovery and production gains, Chevron posted first-quarter 2018 earnings per share of $1.90 per share, handily beating the Zacks Consensus Estimate of $1.45.

In contrast, Exxon Mobil’s earnings per share of $1.09 missed the Zacks Consensus Estimate of $1.14, thanks to plunge in oil equivalent production, decreased refinery throughput and lower margins at the chemical business.

Considering a more comprehensive earnings history, Chevron has delivered positive surprises in three of the prior four quarters with an average earnings surprise of -1.30%. In comparison, Exxon Mobil delivered earnings beat in just one of the trailing four quarters, with an average negative earnings surprise of 5.73%.

Production

Over the past few years, Exxon Mobil and Chevron have struggled to replace reserves, as access to new energy resources becomes more difficult. Given their large base, achieving growth in oil and natural gas production is anyways a challenge for these companies over the last many years.

Nevertheless, both the companies were able to grow their saw their upstream (or exploration and production) business earnings. The strong performance from the upstream segment more than made up for the weaker earnings in their downstream businesses, which refines crude oil into fuels like gasoline and diesel oil.

In particular, Exxon Mobil and Chevron have started making money on their ever-expanding domestic shale resources - concentrated in the lucrative Permian Basin of west Texas and New Mexico.

Exxon Mobil’s U.S. unit recorded quarterly earnings of $429 million, turning around from a loss of $18 million in the year-ago quarter. On the other hand, Chevron’s comparable segment reported $648 million of earnings from its domestic upstream business, compared with $80 million last year.

Despite improving considerably, Exxon Mobil is still way behind Chevron in terms of extracting oil from the cheap and plentiful shale resources. Even now, Exxon Mobil is heavily dependent on the expensive offshore resources.

Even in terms of overall production growth, Chevron is a clear winner. During the first quarter, the Irving, TX-based oil and natural gas powerhouse Exxon Mobil’s production averaged 3,889 thousand oil-equivalent barrels per day (MBOE/d), 6.3% lower than the year-ago output of 4,151 MBOE/d. For another domestic behemoth Chevron, total volume of crude oil and natural gas was up 6.6% from the year-earlier level at 2,852 MBOE/d.

As it is, Chevron’s existing oil and gas development project pipeline is among the best in the industry – targeting volume growth of 4-7% in 2018 – driven by the big Australian LNG projects (Gorgon and Wheatstone), as well as deepwater developments in the U.S. Gulf of Mexico and the Permian operations.

Oil/Gas Split

Exxon Mobil is somewhat less leveraged to global crude prices in that 57% of its total production comes from liquids. This is lower than approximately 60% for Chevron and has worked to Exxon Mobil’s disadvantage amid rebounding oil prices.

Further, with natural gas prices trading under $3 per MMBtu and Exxon Mobil being one of the largest producers of the low-value fuel in the U.S. – courtesy the ill-timed XTO Energy deal – the company’s upstream earnings growth have been restricted.

Valuation

Compared with the S&P 500, the broader industry is overvalued. This implies that the industry carries the risk of lower returns in the near future. The industry has an average one year trailing 12-month P/E ratio of 21.6, which is slightly above the S&P 500 average of 20.0.

Coming to the two integrated majors under consideration, Exxon Mobil stock now trades at about 22.3 times trailing 12-month earnings and 17.5 times forward earnings for 2018, while Chevron stock is valued at 28.3 times trailing 12-month earnings and about 17.4 times forward earnings.

While both stocks are overvalued compared to the industry and the S&P 500, being a touch more expensive, Chevron shares are more prone for a fall.

Dividend Yield

Both the diversified oil companies have a long and consistent dividend paying record. They are the only two energy stocks on the list of Dividend Aristocrats - a group of 51 companies in the S&P 500 Index that have raised their payouts for more than 25 years in a row.

Exxon Mobil and Chevron have continued to reward shareholders with large annual dividends of $3.28 and $4.48 per share. In April, Exxon Mobil boosted its quarterly payout for the 35th consecutive year. Meanwhile, Chevron raised its dividend in February for the 29th straight year, putting the company in line for a 31st consecutive annualized dividend hike in 2018.

In the last one-year period, the dividend yield for Exxon Mobil was higher than the broader industry. While the Oil & Gas International Integrated industry offers a yield of 3.88%, Exxon Mobil returns 4.01%. Chevron falls short on this count, providing a dividend yield of 3.46%. But on absolute terms, Chevron is better off on this front compared to Exxon Mobil.

Capital Expenditure & Cash Flows

At $4,867 million, Exxon Mobil’s capital and exploration expenditure for the first three months of this year has run 17% higher than in the equivalent period of 2017. Meanwhile, Chevron managed to keep its outlay essentially unchanged at $4,405 million.

Looking at the companies’ cash flow from operations, an important gauge of financial health in the oil and gas industry, Chevron delivered a good performance in the first quarter. The company recorded $5,043 million in cash flow from operations, up from $3,777 million a year ago.

Exxon Mobil didn’t perform too badly either, raking in $9,960 of cash flows in the quarter – the highest since 2014.

Importantly, both Exxon Mobil and Chevron were comfortably able to cover the spending on shareholder distributions and capital expenditures with cash flow from operations, which resulted in free cash flows of $6.7 billion and $4.2 billion, respectively.

But going forward, we expect Chevron's cash flow to improve significantly amid the company's initiatives in cost reduction, exiting unprofitable markets and streamlining the organization.

While ExxonMobil remained free cash flow-positive throughout the commodity price collapse as opposed to Chevron, the advantage is slipping rapidly. Moreover, with Chevron keeping a tight leash on capital spending and being one of the most oil-weighted majors, the company wins this round to its larger rival.

Financial Health

Exxon Mobil and Chevron are two of the best-run companies among the global oil majors, consistently producing industry-leading financial returns. Both are still sound financially. In fact, their financial flexibility and strong balance sheets are real assets.Both remain in excellent financial health, with enough in cash on hand and a very manageable debt-to-capitalization ratio. Exxon Mobil, though, with a lower ratio of 10.7% scores over Chevron’s 20.5%.

Conclusion

Our comparative analysis shows that Exxon Mobil holds an edge over Chevron only when considering valuation, dividend yield, debt and cash flows (partly due to its larger size). However, on all other counts, Chevron is clearly a better stock. This is why it may be Chevron that might soon get upgraded to a Zacks Rank #2 (Buy).

It’s true that Exxon Mobil’s business, being significantly larger than Chevron’s, gives it the gargantuan scale to stand up a bit better to industry headwinds. However, the latter’s attractive production growth profile, Australian LNG projects and crude leverage tilts the balance in its favor.

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