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A Bet on Long-Term Oil Demand: Chevron and Exxon Mobil Commence Dealmaking Arms Race
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Exxon Mobil (XOM - Free Report) and Chevron (CVX - Free Report) reported quarterly earnings Friday morning, and both companies missed quarterly earnings expectations. The energy giants saw EPS drop more than -40% YoY, in stark contrast to last year’s banner performance.
Both stocks are selling off following the report, with Exxon Mobil down -2.3% midday and Chevron down -6%. However, amid the earnings miss and stock weakness, there were still some compelling highlights. Chevron has returned a record $20 billion of cash to shareholders YTD, while Exxon Mobil returned $8.1 billion in just the third quarter and raised the dividend to $0.95 per share.
Massive Deals Closed this Month
Also happening in the background, the energy supermajors Exxon Mobil and Chevron have further consolidated the oil market through some of the largest deals in industry history this past month. Exxon Mobil acquired Pioneer Natural Resources (PXD - Free Report) for $59.5 billion earlier this month, while Chevron bought Hess (HES - Free Report) for $53 billion this week.
Exxon’s acquisition of Pioneer Natural Resources will significantly boost its exposure to the Permian Basin, which is the largest oil reserve in the US. Chevron’s purchase of Hess now gives the energy producer significant exposure to Guyana, which is the newest booming offshore oilfield. Since 2015 some 30 new discoveries have been made offshore, turning the South American country of 800,000 people into a new major player in the oil market.
Exxon Mobil already had a 45% stake in the reserves, but this acquisition of Hess, which has a 30% stake now, gives Chevron a major foothold.
These acquisitions by energy giants stand in stark contrast with International Energy Agency (IEA) expectations for future oil consumption. The oil authority recently released a report finding that oil demand will peak by 2023, but oil companies think differently.
In an interview with the Financial Times, Chevron’s CEO Mike Wirth criticized the IEA saying “I don’t think they are remotely right… You can build scenarios, but we liver in the real world, and have to allocate capital to meet real-world demands.”
Stock Performance
So, with all these developments in the oil stocks, can investors pick one: Exxon Mobil or Chevron? Let’s take a look.
Over the last five years both stocks have performed almost in lock step, beating the sector returns and just slightly edging out the broad market over that period. But if you go back a bit further, Chevron has outperformed Exxon Mobil by a significant margin.
Over the last 20 years Chevron has compounded at an annual rate of 11.4% for a total of 795% and Exxon has compounded at 9%, for a total return of 473%. Should we expect this outperformance to continue, or may it flip going forward?
Image Source: Zacks Investment Research
Technical Divergence
After today’s mostly disappointing report, both stocks are selling off, but one looks much more conducive to higher prices than the other.
The chart below is the price action of Exxon Mobil. We can see that the stock has been carving out a wide consolidation throughout this year, and following the bad news is trading lower, but holding the lower bound of support.
Image Source: TradingView
Conversely, Chevron is staging a major breakdown from the very large pennant pattern. This divergence in technical I think is indicative of investors expectations for the stocks.
Image Source: TradingView
Free Cash Flow Yield
The two stocks have nearly identical earnings multiples, with XOM trading at a one year forward multiple of 11.5x, and CVX trading at 11.3x, which has been the case for many years.
However, when looking at Free Cash Flow Yield one is clearly better than the other. When looking at stocks I often like to look at FCF yield as it gives a high signal look into explicitly how much cash the companies are producing.
With an FCF Yield of 11.8%, Exxon Mobil has a 260-basis point lead on CVX’s 9.2% yield. Now each of these are quite impressive, but the higher yield from XOM is undeniably more appealing.
Image Source: Zacks Investment Research
Bottom Line
While the competition between Exxon and Chevron will continue to wage on, one thing appears certain. European energy producers are likely being hampered by the increasing pressures from their local authorities, whose push for a clean energy transition is far more aggressive than the American counterparts. Because of this, I think we can assume the American energy companies should experience superior returns to their European counterparts, thanks to the fewer constrains.
But between Chevron and Exxon Mobil, which stock is the winner? I lean towards Exxon Mobil, because its business is a bit more diversified than Chevron’s, it has a higher Free Cash Flow yield minimizing downside, and it has clearly had a better response to the poor earnings report.
However, it should be noted that these two businesses are far more similar than they are dissimilar, so regardless of which one investors prefer, both are likely to remain long-term winners.
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A Bet on Long-Term Oil Demand: Chevron and Exxon Mobil Commence Dealmaking Arms Race
Exxon Mobil (XOM - Free Report) and Chevron (CVX - Free Report) reported quarterly earnings Friday morning, and both companies missed quarterly earnings expectations. The energy giants saw EPS drop more than -40% YoY, in stark contrast to last year’s banner performance.
Both stocks are selling off following the report, with Exxon Mobil down -2.3% midday and Chevron down -6%. However, amid the earnings miss and stock weakness, there were still some compelling highlights. Chevron has returned a record $20 billion of cash to shareholders YTD, while Exxon Mobil returned $8.1 billion in just the third quarter and raised the dividend to $0.95 per share.
Massive Deals Closed this Month
Also happening in the background, the energy supermajors Exxon Mobil and Chevron have further consolidated the oil market through some of the largest deals in industry history this past month. Exxon Mobil acquired Pioneer Natural Resources (PXD - Free Report) for $59.5 billion earlier this month, while Chevron bought Hess (HES - Free Report) for $53 billion this week.
Exxon’s acquisition of Pioneer Natural Resources will significantly boost its exposure to the Permian Basin, which is the largest oil reserve in the US. Chevron’s purchase of Hess now gives the energy producer significant exposure to Guyana, which is the newest booming offshore oilfield. Since 2015 some 30 new discoveries have been made offshore, turning the South American country of 800,000 people into a new major player in the oil market.
Exxon Mobil already had a 45% stake in the reserves, but this acquisition of Hess, which has a 30% stake now, gives Chevron a major foothold.
These acquisitions by energy giants stand in stark contrast with International Energy Agency (IEA) expectations for future oil consumption. The oil authority recently released a report finding that oil demand will peak by 2023, but oil companies think differently.
In an interview with the Financial Times, Chevron’s CEO Mike Wirth criticized the IEA saying “I don’t think they are remotely right… You can build scenarios, but we liver in the real world, and have to allocate capital to meet real-world demands.”
Stock Performance
So, with all these developments in the oil stocks, can investors pick one: Exxon Mobil or Chevron? Let’s take a look.
Over the last five years both stocks have performed almost in lock step, beating the sector returns and just slightly edging out the broad market over that period. But if you go back a bit further, Chevron has outperformed Exxon Mobil by a significant margin.
Over the last 20 years Chevron has compounded at an annual rate of 11.4% for a total of 795% and Exxon has compounded at 9%, for a total return of 473%. Should we expect this outperformance to continue, or may it flip going forward?
Image Source: Zacks Investment Research
Technical Divergence
After today’s mostly disappointing report, both stocks are selling off, but one looks much more conducive to higher prices than the other.
The chart below is the price action of Exxon Mobil. We can see that the stock has been carving out a wide consolidation throughout this year, and following the bad news is trading lower, but holding the lower bound of support.
Image Source: TradingView
Conversely, Chevron is staging a major breakdown from the very large pennant pattern. This divergence in technical I think is indicative of investors expectations for the stocks.
Image Source: TradingView
Free Cash Flow Yield
The two stocks have nearly identical earnings multiples, with XOM trading at a one year forward multiple of 11.5x, and CVX trading at 11.3x, which has been the case for many years.
However, when looking at Free Cash Flow Yield one is clearly better than the other. When looking at stocks I often like to look at FCF yield as it gives a high signal look into explicitly how much cash the companies are producing.
With an FCF Yield of 11.8%, Exxon Mobil has a 260-basis point lead on CVX’s 9.2% yield. Now each of these are quite impressive, but the higher yield from XOM is undeniably more appealing.
Image Source: Zacks Investment Research
Bottom Line
While the competition between Exxon and Chevron will continue to wage on, one thing appears certain. European energy producers are likely being hampered by the increasing pressures from their local authorities, whose push for a clean energy transition is far more aggressive than the American counterparts. Because of this, I think we can assume the American energy companies should experience superior returns to their European counterparts, thanks to the fewer constrains.
But between Chevron and Exxon Mobil, which stock is the winner? I lean towards Exxon Mobil, because its business is a bit more diversified than Chevron’s, it has a higher Free Cash Flow yield minimizing downside, and it has clearly had a better response to the poor earnings report.
However, it should be noted that these two businesses are far more similar than they are dissimilar, so regardless of which one investors prefer, both are likely to remain long-term winners.