Exxon Mobil vs. Chevron – Which One Is A Better Bet For Shareholders?

The tumultuous state of the commodity markets over the last two years has made investors anxious about the future of their investments. The worst-ever commodity trough that began in mid-2014 not only led to a sharp drop in the profitability of oil and gas companies across the globe, but also forced several companies to go bankrupt. As a result, the investors saw large integrated oil and gas companies as a safer bet in this oil slump, since the weakness in their upstream operations could be partially offset by the improved performance of their downstream operations. However, the prolonged weakness in the commodity prices has caused a deterioration in the downstream performance of these companies, resulting in lower investor returns over time.

In this note, we compare two of the largest integrated energy companies in the world — Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) — to analyze how the commodity slowdown has impacted their returns and which of the two can generate better future returns for its investors.

Stock Appreciation

Both, Exxon Mobil, and Chevron, were trading at their all-time highs of $104 and $133 per share respectively in mid-2014, when the commodity markets started declining. Since oil and gas stocks, particularly upstream, are highly correlated to the volatility in the commodity prices, the two companies witnessed a steep drop in their market values. However, the two stocks fared better than the independent oil and gas companies and bottomed out in September 2015, much faster than the recovery in commodity markets in the second half of 2016. Today, the two companies have regained most of their eroded value, and are trading closer to their 2014 averages.

That said, when we compare the two, we see that while Exxon Mobil has redeemed most of its foregone value, it has been unable to result in any capital gain for its investors in the last two years. On the contrary, Chevron has not only managed to recoup its past value but has also returned value to its investors in the form of stock appreciation. Below, we show how Chevron has delivered a higher compounded annual rate of return (CAGR) than Exxon over the last couple of years.

Dividend Yield

Dividend yield is a crucial, and a closely watched, metric for investors who seek a regular income from their investments. Exxon Mobil and Chevron are known as dividend aristocrats, as they not only pay out handsome dividends to their shareholders, but have raised the amount of their dividends for at least 25 years in a row. Thus, it becomes important to compare the two companies on this parameter.

The table below indicates that Exxon Mobil has continued to increase its annual dividend at a CAGR of around 5% in the last two years, despite its dwindling profitability and cash flows. On the other hand, Chevron had to stagnate its annual dividend payments at $4.29 per share in 2016 as the persistently low commodity prices weighed heavily on the company’s cash flows. However, in spite of continuously growing its dividend in a weak price environment, Exxon’s average dividend yield over the last three years has been 3.2%, sizeably lower than that of Chevron’s 4.1% yield. This implies that a shareholder investing one dollar in Chevron would earn a higher return (4.1% on an average) in terms of dividend compared to what he would generate by putting the same money in Exxon.

Return On Equity

Another critical metric that investors consider while investing in a company is the return on equity, commonly known as ROE. This number explains the profits generated by the company for each dollar invested by the shareholders. The table below depicts that Exxon Mobil generated an average ROE of 10.5% in the 2014-2016 time frame, more than double of Chevron’s average ROE of 5% in the same period. While both the companies have experienced a steep drop in their profitability since 2014, Chevron’s profits have declined much more than that of Exxon’s. 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. Hence, we believe that Exxon holds an upper hand as far as the return on equity metric is concerned.

Based on the above discussion, we believe that in comparison to Exxon, Chevron has a potential to deliver enhanced returns to its shareholders through capital appreciation, dividends, and return on equity. However, the returns of the two companies are highly dependent on their operational performance and managerial expertise, coupled with the timeliness of the rebound of the commodity prices.

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