Most oil and gas producers, including Exxon Mobil (XOM) and Chevron (CVX) , posted record profits last year thanks to the rally in prices of oil and gas, which largely reflected the sanctions of western countries on Russia for its invasion of Ukraine.
In addition, as oil prices have remained elevated, the stocks of the two oil giants are hovering around their all-time highs. As most of the easy money has been made on these two stocks, it is only natural that most investors wonder which one is the most attractive.
Let's compare the two oil majors.
Exxon Mobil is the second-largest oil company in the world, with a recent market capitalization of $459 billion, behind only Saudi Aramco (ARMCO). The company is one of the most integrated, diversified oil producers in the world. In 2022, Exxon generated 67% of its total earnings from its upstream segment while its downstream and chemical segments generated 27% and 6% of its total earnings, respectively.
Chevron is less diversified than Exxon. In 2019, 2021 and 2022, Chevron generated 78%, 84% and 79% of its earnings from its upstream segment, respectively. While most oil majors produce crude oil and natural gas at approximately equal ratios, Chevron is more leveraged to the oil price, with a 57/43 production ratio. Moreover, as the company prices some natural gas volumes based on the oil price, nearly 75% of its production is priced based on the oil price. As a result, Chevron is more leveraged to the oil price than Exxon.
Exxon and Chevron were severely hit by the Covid-19 pandemic in 2020 and as a result incurred material losses in that year. However, thanks to the recovery of global oil consumption from the pandemic, the two oil majors recovered in 2021. Even better, due to the sanctions imposed by the U.S. and Europe on Russia for its invasion in Ukraine, oil and gas prices rallied to 13-year highs last year. As a result, Exxon and Chevron achieved record earnings per share last year.
As the upstream segment of Chevron generates a greater portion of its total earnings than the upstream segment of Exxon, one would expect Chevron to benefit more than Exxon from the rally in prices of oil and gas. However, the sanctions greatly tightened the global market of refined products as well. As a result, refining margins skyrocketed to unprecedented levels and thus the downstream segment of Exxon posted outsized earnings. Overall, both oil majors have benefited almost equally from the Ukrainian crisis.
The price of oil has somewhat moderated and the price of natural gas has plunged lately, primarily due to an abnormally warm winter in the U.S. and Europe. Consequently, both companies are likely to post lower earnings this year. Nevertheless, as the price of oil has remained above average and refining margins have remained exceptionally high, both oil majors are likely to post strong earnings this year as well.
Exxon is the only oil major that has failed to grow its production over the last 14 years. The company is still producing about 4.0 million barrels per day of oil equivalent, the same amount it was producing back in 2008. This disappointing performance is in sharp contrast to that of Chevron, which has consistently grown its production over the last five years.
Both companies rely heavily on the Permian Basin in order to fuel future growth. Apart from the Permian Basin, Chevron has growth projects in the Gulf of Mexico whereas Exxon has one of the most exciting growth projects in the oil industry, in offshore Guyana. During the last five years, Exxon has more than tripled its estimated reserves in the area, from 3.2 billion barrels to approximately 11.0 billion barrels.
Moreover, a few months ago, Exxon provided a promising growth plan for the next five years. The company expects to spend $20 billion-$25 billion per year on capital expenses and double its earnings by 2027 vs. 2019. Exxon expects to achieve such a great performance by investing most of its funds in areas will low-cost barrels, namely the Permian Basin, Guyana and Brazil. Notably, Exxon will direct about 90% of its investments to reserves that are expected to yield an annual return of more than 10% even at oil prices around $35. Overall, the oil giant will high-grade its asset portfolio drastically in the upcoming years and as a result it will greatly improve its profitability at a given level of oil prices.
Exxon's growth plan is undoubtedly exciting. However, the oil industry is so cyclical and unpredictable that investors should not take Exxon's forecast as a given. For perspective, Exxon issued a similar seven-year growth plan in early 2018. According to that growth plan, the company expected to grow its production by 25%, from 4.0 million barrels per day in 2018 to 5.0 million barrels per day in 2025, primarily thanks to its investments in the highly promising regions of the Permian Basin and Guyana.
However, Exxon's actual performance deviated from the plan by a wide margin. When the pandemic struck, the company curtailed its investments drastically in order to preserve funds and defend its generous dividend. In addition, the natural decline of its producing oil fields took its toll on production. As a result, the output of Exxon has declined approximately 5% since 2018, a much worse outcome than the expected increase of 25%. Nevertheless, the company's recent growth plan is undoubtedly promising.
Chevron has a promising growth plan as well. The company expects to invest $13 billion-$15 billion per year in growth projects over the next five years. Thanks to these growth projects, Chevron expects to grow its production by more than 3% per year on average over the next five years. Moreover, as the company will invest in low-cost barrels, it expects to greatly increase its earnings at a given price of oil.
It is also worth noting that Chevron has posted a reserve replacement ratio of 99% over the last decade. This figure is much better than that of most oil majors, which have incurred a decrease in their reserves over the last decade.
The oil industry is highly cyclical and hence it is extremely hard for oil companies to grow their dividends for decades. Exxon and Chevron are the only two oil companies that belong to the best-of-breed group of Dividend Aristocrats. This group includes the companies that have raised their dividends for at least 25 consecutive years. Exxon and Chevron have raised their dividends for 40 and 36 consecutive years, respectively.
While both oil majors have long dividend growth streaks, income-oriented investors should be careful, especially now that the oil industry has almost certainly passed the peak of its cycle. Due to the rally of Exxon and Chevron shares close to all-time highs, both stocks are currently offering nearly eight-year low dividend yields. Chevron is offering a 3.7% dividend yield, which is higher than the 3.3% yield of Exxon.
However, Chevron has already raised its dividend this year whereas Exxon is expected to announce its next dividend hike later this year. Moreover, Chevron has a payout ratio of 40% whereas Exxon has a payout ratio of 35%. When Exxon raises its dividend, its yield and its payout ratio will come closer to the metrics of Chevron. Overall, both stocks are currently offering almost equally attractive dividends.
It is also important to note that both oil giants have strengthened their balance sheets by taking advantage of their record free cash flows. Given their healthy payout ratios and their strong balance sheets, their dividends are safe for the foreseeable future. On the other hand, the nearly eight-year low dividend yields of both stocks probably signal that they are overvalued from a long-term perspective.
As long as the price of oil and refining margins remain high, both Exxon and Chevron will continue thriving, with negligible differences in their performance.
Chevron benefits more than Exxon from high oil prices but Exxon benefits more than Chevron from wide refining margins. With that said, Chevron has a better production growth record and proved more resilient to the pandemic than Exxon, which came on the brink of cutting its dividend in 2020.
Nevertheless, due to the high cyclicality of the oil industry, both stocks are probably overvalued right now from a long-term perspective, with significant downside risk whenever the price of oil enters its next downcycle.