Depressed commodity prices over the last couple of years have severely impacted the profitability of oil and gas companies worldwide, throwing a number of companies out of business. However, companies that continue to hold high-quality assets, and have an experienced management, have been able to weather the current commodity slump efficiently and are likely to emerge undefeated from this downturn. In this note, we compare two of the world’s largest energy integrated company’s — Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) — based on their reserves, production, and operational performance to analyze which of the two companies have stronger fundamentals to survive the commodity trough. (Also read: Exxon Mobil vs. Chevron – Which One Is A Better Bet For Shareholders?)
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A company’s proved reserves entail the amount of resources that can be recovered from its deposits with a reasonable level of certainty. As of 31st December 2016, Exxon Mobil had proved reserves of almost 20 billion barrels of oil equivalent (boe), which are equally distributed between liquid and gas reserves, and spread over North and Latin America, Europe, and Asia-Pacific. On the same date, Chevron held proved reserves of 11 billion boe, of which 57% were liquid reserves. While the two companies have reserves in identical geographies, Exxon Mobil holds 80% more proved reserves compared to Chevron.
At the current production levels, Exxon has sufficient proved reserves to sustain its production for over 20 years. On the other hand, Chevron has a reserve inventory that will last only 14 years at its current rate of production. This implies that Exxon has an edge over Chevron, since the former has identified reserves that will allow the company to sustain its production for 6 years longer than the latter, assuming that the two companies do not explore any new reserves.
The turbulence in the commodity markets has forced the majority of oil and gas companies to hold back their production in order to alleviate their losses in a low price environment. However, since integrated companies, such as Exxon and Chevron, have the advantage of offsetting their upstream losses with their downstream operations, these companies have continued to grow their production, despite the declining commodity prices.
In the last couple of years, Exxon has increased its upstream output to 2.7 million boe per day, growing at a compounded annual growth rate (CAGR) of 1.7%. In contrast, Chevron’s production has remained flat over the last two years. This is primarily because the company could not maintain its production growth in 2016 due to the persistently low commodity prices, despite growing its production by 1.7% in 2015. Since Exxon already has a higher production growth, we believe that the company will be in a better position to leverage the anticipated rebound in commodity prices over the next few quarters compared to its closest rival, Chevron.
As mentioned earlier, plummeting commodity prices have resulted in the deterioration of the profitability of most of the companies in the oil and gas industry. However, due to their large scale and integrated operations, Exxon and Chevron have managed to remain profitable for most of the downturn. Exxon’s downstream performance has improved drastically over the last two years, as the drop in commodity prices has led to an expansion in the refining margins globally. Contrary to this global trend, Chevron’s downstream operations turned negative in 2016, pulling down the company’s profits for the year. In fact, Chevron made a net loss of around $500 million in 2016, as opposed to a net profit of $7.8 billion recorded by Exxon in the same year.
Thus, while Chevron’s average upstream EBITDA over the last three years is higher than Exxon’s average, the former’s declining downstream operations have created a drag on the company’s overall profitability. Moreover, with the anticipated recovery in commodity prices, the downstream margins are likely to drop further, which will continue to weigh on Chevron’s margins, unless the company manages to generate a significant improvement in its upstream operations.
Thus, we conclude that Exxon has a robust portfolio of high quality assets and a better operational performance compared to its rival, Chevron. Consequently, we believe that the company continues to hold strong fundamentals and has a huge upside potential as, and when, the commodity prices bounce back.
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