Tough to Compare Two Industry-Leading Dividend Aristocrats
Chevron Corporation (NYSE: CVX) and Exxon Mobil Corporation (NYSE: XOM) are two of the world’s largest integrated oil and gas companies. Chevron has refining operations in North America, South Africa and the Asia-Pacific with system capacity to process 1.9 million barrels of crude oil per day, and a solid sales and marketing presence in 84 countries. Exxon Mobil has been in the refinery business for over 100 years and processes over 1.9 million barrels of crude oil per day in the United States alone, and has a global presence in 50 countries. While Exxon Mobil has a slightly smaller global footprint than Chevron, it is the bigger of the two in production, revenue and market capitalization. Chevron operates segments including upstream, downstream, refining, chemicals, power and technology while Exxon Mobil operates upstream, downstream, refining, chemicals and natural gas power segments. On the surface, the companies have largely comparable businesses.
Chevron Selectively Divesting Assets For Cash; Aims to Invest in Production Growth of 20% to 3.1 Billion BOE by 2017
Chevron has been divesting non-core and low margin businesses, with plans to use cash from asset sales to boost investment in growth projects down the road, after oil prices stabilize beyond 2017. For example, Chevron recently exited its position in Australian fuel and oil company, Caltex, selling its 50% stake for approximately $3.7 billion. Chevron also sold its interest in Romanian and Polish shale gas projects to invest in core business growth opportunities. Chevron CEO John Watson announced plans to sell $15 billion in assets and freeze new investments through 2017 to protect the company against a near 50% drop in oil prices over the past year. Mr. Watson reaffirmed the company’s commitment to capital spending of $35 billion in 2015 to grow production from 2.6 million BOE (barrels of oil equivalent) in 2014 to 3.1 million BOE by 2017.
Chevron hopes to buttress its leadership position in the Gulf of Mexico through a joint development agreement with rivals BP plc (BP) and ConocoPhillips (CP) to explore and appraise 24 offshore leases, including promising discoveries in the Keathley Canyon Deepwater GOM region. Chevron also entered into a sales and purchase agreement to supply 4.15 million tons of liquid natural gas to South Korean petroleum company SK LNG Trading PTE from 2017 to 2022.
Exxon Plans to Grow Production by 14% to 4.3 Billion BOE by 2017
Exxon Mobil began production at its Sakhalin project in the Arkutun-Dagi field of Russia, its Cold Lake Nabiye expansion project in Alberta, Canada, and its Harrian South project in the Gulf of Mexico. The company resumed drilling at the Point Thompson field in Alaska and hopes to bring the field online in 2016. Over the next 3 years, Exxon Mobil plans to complete 16 oil and gas projects to grow production to 4.3 billion BOE by 2017 with capital expenditures of $34 billion in 2015 and a slightly lower level in 2016 and 2017, with monies flowing to attractive downstream projects and fewer upstream investments with oil prices at current levels of close to $60 per barrel (as of 5/22/2015).
Exxon Mobil recently discovered significant high-quality oil-bearing sandstone reservoirs approximately 120 miles off the coast of Guyana after exploratory well drilling. Exxon Mobil indirectly holds a 45% interest in the offshore field that covers about 6.6 million acres.
Exxon Mobil signed an agreement to supply the country of Papua New Guinea (PNG) with 20 million cubic feet of natural gas per day for the next 20 years. Additionally, the agreement gives Exxon Mobil development and pipeline licenses for the P’nyang field in PNG.
Sharp Drop in Crude Prices Has Dropped Shares of Both Companies by About 15%
Chevron shares closed at $104.89 on 5/22/2015, close to the low end of the company’s 52-week range of $98.88 – $135.10, with a market capitalization $197.24 billion,. Over the last year, shares have fallen about 15% and are down about 7% year-to-date. With earnings of $9.16 per share, Chevron shares have a price-to-earnings ratio of 11.5x.
Exxon Mobil shares closed at $86.52 on 5/22/2015, also near the low end of its 52-week range of $82.68 – $104.76, with a market capitalization $361.75 billion. Exxon Mobil shares are also down about 15% over the last year. Exxon Mobil has a price-to-earnings ratio of 13x on earnings of $6.67 per share, about a third below Chevron on a per share basis.
As the chart below shows, Exxon Mobil shares (in brown) have historically traded at higher valuation multiples than Chevron even though Chevron has higher gross, operating, EBITDA and net profit margins. However, over the past year, Exxon Mobil has delivered higher returns on assets (8.4% for XOM vs. 6.6% for CVX), equity (16.3% vs. 11.3%) and inventory (10.5% vs. 7.5%).
Chevron was downgraded from a Neutral rating to a Sell rating, with its share price target lowered from $110 to $99 by Goldman Sachs (GS) while Britain’s Barclays (BCS) maintained an Equal-weight rating and price target of $115. Research firms have not taken any recent action on Exxon Mobil but the company has an average rating of Hold with average price target of $93.61 and high price target of $113.
As of 5/22/2015, Chevron shares traded at a 27% premium to book value while Exxon Mobil shares traded at a 111% premium to book value. Chevron offers a deeper discount to investors over Exxon Mobil and, according to analysts, offers greater share price appreciation potential over the next 12 months.
Share Buybacks Paused At Both Companies
In January 2015, Chevron paused its share repurchase program for 2015 after spending $5 billion on buybacks in 2014. Chevron is now focused on maintaining dividends and increasing cash flows to counteract the dip in oil prices. From 2010 to 2014, Chevron repurchased $19 billion in shares.
Exxon Mobil also lowered its 2015 share repurchase program to $1 billion per quarter after repurchasing $3 billion in shares in Q4 2014. Management plans to emphasize capital investments to grow production as its long-term strategy. From 2010 to 2014, Exxon Mobil repurchased $85.5 billion in shares.
Both Are Dividend Aristocrats with Proven Long-Term Dividend Growth
Chevron has the fourth highest dividend yield and Exxon Mobil has the 7th highest dividend yield on S&P 500’s prestigious Dividend Aristocrats list.
Chevron declared a second quarter cash dividend of $1.07 per share, to be paid on June 10, 2015, to shareholders on record as of May 19, 2015. This dividend was unchanged compared to Q1 2015 but up 7% year-over-year. Chevron has consistently increased its annual dividend since 1993, when the company began paying dividends to shareholders. The company offers investors an annual dividend of $4.28 and a dividend yield of 3.9% (as of 5/22/2015).
Exxon Mobil declared a second quarter cash dividend of $0.73 per share, to be paid on June 10, 2015, to shareholders on record as of May 13, 2015. The latest dividend represents a year-over-year and quarter-over-quarter increase of 6%. Exxon Mobil has paid dividends since 1911 and increased dividends annually for the last 33 consecutive years. The company offers investors an annual dividend of $2.92 and a dividend yield of 3.4% (as of 5/22/2015).
Falling Oil Prices Have Impacted Margins at Both Companies
Both companies recently reported first quarter financial results for the three months ended March 31, 2015, with results hit hard by the slump in oil prices. Chevron reported total revenues of $34.56 billion (down 35%) and net income of $2.57 billion (down 43%), or $1.37 per share. Exxon Mobil reported total revenues of $67.62 billion (down 36%) and net income of $4.94 billion (down 46%), or $1.17 per share. The drop in revenues largely reflects the percentage drop in crude oil prices.
For the trailing twelve months as of March 31, 2015, Chevron had a profit margin of 9.96% while Exxon Mobil had a profit margin of 8.48%. But going forward, Wall Street believes Exxon Mobil is better positioned to boost profit margins.
Chevron Has Stronger Balance Sheet; Exxon Mobil Delivers Better Returns
As of March 31, 2015, Chevron had $12.68 billion in cash and cash equivalents, $29.45 billion in long-term debt and $155.8 billion in total stockholders’ equity while Exxon Mobil had $5.18 billion in cash and cash equivalents, $19.49 billion in long-term debt and $171.23 billion in total shareholders’ equity.
But as the graphs above show, Exxon Mobil has delivered higher returns on a larger asset base than Chevron.
At the end of the day, both companies represent compelling value and a formidable and growing dividend stream, so it’s hard to pick one over the other because they are both focused on revenue growth, dividend growth and have solid industry-leading positions. However, Exxon Mobil has historically delivered higher returns than Chevron and XOM shares have historically traded at higher valuation multiples than CVX. Analyst price targets also reflect neutral to greater upside for XOM but more of a bearish sentiment on CVX shares. Even so, it’s hard to pick a clear winner so investors could consider balancing their portfolio with an equal dollar-weighting on both companies for asset allocation within the oil and gas sector.