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Nilanjan Choudhury

Chevron vs. ExxonMobil: Which Is Better Positioned Post-Q3?

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ExxonMobil Corp. (XOM - Free Report) and Chevron Corp. (CVX - Free Report) – with their massive market capitalizations of $360 billion and $206 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.

But how do you choose between the two supermajors? Here’s a look at ExxonMobil and Chevron stocks’ performance in 2016.

Stock Performance

Despite all commodity-related headwinds, both ExxonMobil and Chevron have handily outperformed the S&P 500 in the current year, with Exxon Mobil stock rising 11% to Chevron’s 21%, compared to the S&P 500’s gain of just 7%. Of course, these are numbers at a time when oil prices recovered from a 12-year low of $26.21 a barrel in February to $50/barrel mark in early June, slipped again to under $40 only to rally toward $50 once more.

ExxonMobil stock now trades at about 40 times trailing twelve months’ earnings and 39 times forward earnings for 2016, while Chevron stock is valued at 232 times trailing twelve months’ earnings and about 88 times forward earnings.

Being much more expensive, Chevron shares are primed for a fall.

Recent Earnings

In an indication of the industry’s adaptability to low commodity prices, ExxonMobil and Chevron reported earnings beats for the three months ended Sep 30, although profits deteriorated from the year-ago quarter.

Moreover, the two largest U.S. energy companies by market value are experiencing signs of weakness in the refining business, suggesting that the units – which had saved them when crude prices plunged – could now be a drag. In fact, ExxonMobil and Chevron’s ‘downstream’ unit profits dived 40% and 50%, respectively, from the comparable period of 2015.

The deteriorating downstream results could be attributed to a fall in refining margins as the cost of gasoline, heating oil and other refined products catches up on the beaten down crude price. Following a prolonged period of high differentials, crack spreads have weakened, which lead to deteriorating earnings and cash flows.

As it is, the companies are struggling with faltering sales of their exploration and production businesses amid plunging commodity prices.

Production & Capital Expenditure

Exxon Mobil and Chevron are suffering from marginal or falling returns, reflecting their struggle 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.

During the Jan-Sep period, the Irving, TX-based oil and natural gas powerhouse ExxonMobil’s production averaged 4,030 thousand oil-equivalent barrels per day (MBOE/d), essentially unchanged from the first nine months of 2015. For another domestic behemoth Chevron, total volume of crude oil and natural gas was down 1.4% from the year-earlier level at 2,569 MBOE/d.

Despite broadly similar production profiles, Chevron’s attractive growth prospects set it apart. Chevron’s existing oil and gas development project pipeline is among the best in the industry – targeting volume growth from the current 2.5 million barrels of oil equivalents per day (MMBOE/d) to 2.9-3.0 MMBOE/d by 2017 – driven by the big Australian LNG projects (Gorgon and Wheatstone), as well as deepwater developments in the U.S. Gulf of Mexico.

At $14.5 billion, ExxonMobil’s capital and exploration expenditure for the first three quarters of this year has run 39% lower than in the equivalent period of 2015. Chevron managed to reduce its outlay by 32% to $17.2 billion.

Shareholder Value

Despite the bloodbath, both ExxonMobil and Chevron have continued to reward shareholders with large annual dividends of $3.00 and $4.32 per share – currently yielding 3.5% and 4.0%, respectively. In Apr, ExxonMobil boosted its quarterly payout for the 34th consecutive year, while Chevron raised its dividend last month for the 29th straight year.

With a superior dividend yield, Chevron is more attractive on this front.

However, in a move designed to conserve cash amid the energy price rout, the companies have stopped pouring money into their once-vigorous stock buyback programs. It can be safely inferred that the most notable victim of the commodity meltdown has been share buybacks – gone for not only ExxonMobil and Chevron – but also for European biggies Royal Dutch Shell plc (RDS.A - Free Report) and BP plc (BP - Free Report) .

Cash Flow from Operations

Leaving aside dividends, ExxonMobil’s cash flow from operations and asset sales came in at $16.9 billion in the first nine months of the year. Importantly, this was enough to take care of its capital spending, a testament to the company’s solid operations and cost discipline.

In contrast, Chevron’s cash from operations was $9.0 billion, more than $8 billion short of its capital spending.

While ExxonMobil has remained free cash flow-positive throughout the commodity price collapse as opposed to Chevron, the advantage is slipping rapidly. Investors should note that ExxonMobil’s free cash flow of $4 billion (year-to-date) are down to a sixth of $24 billion five years ago. Moreover, with Chevron being one of the most oil-weighted majors, it might actually become free cash flow-positive very quickly in case of the commodity's rebound as per our expectations.

Bottom Line

ExxonMobil 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 in this highly uncertain period for the economy. Both remain in excellent financial health, with enough in cash on hand and a very manageable debt-to-capitalization ratio. ExxonMobil, though, with a lower ratio of 14% scores over Chevron’s 21%.

Nevertheless, neither ExxonMobil nor Chevron – both carrying Zacks Rank #3 (Hold) – has been spared the effects of the rout in crude prices. But going by their performance thus far in 2016, Chevron seems to be in relatively better shape. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

It’s true that ExxonMobil’s business, being roughly twice the size of Chevron’s, gives it the gargantuan scale to stand up a bit better to industry headwinds. However, the latter’s attractive production growth profile, medium-term project start-ups and crude leverage tilts the balance in its favor.

Not only Chevron offers a higher dividend but If you are expecting oil prices to rebound, one might go with Chevron to reap more rewards.

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