Looking For Investment Income? This Stock Is A Better Alternative Over Exxon Mobil

XOM: Exxon Mobil logo
Exxon Mobil

The shares of Exxon Mobil (NYSE: XOM) and Valero Energy (NYSE: VLO) currently trade at 10% below pre-Covid levels despite high benchmark prices and a recovery in refining margins. Exxon Mobil is the prominent integrated oil & gas company with operations across the globe, and Valero Energy owns 15 refineries in the U.S., Canada, and the U.K. with a throughput capacity of 3.2 million barrels per day. Notably, both stocks are trading at a dividend yield of around 5% and provide an equal opportunity for income investors. However, Valero has been investing heavily in its renewable diesel business, around 40% of its annual capital budget, to comply with emission targets and drive earnings growth. Interestingly, Valero is targeting a 25% IRR hurdle rate for its new renewable diesel and ethanol production projects which is almost comparable to the 30% return on Exxon Mobil’s upstream investments as per third-party price outlooks. While Exxon focuses on the conventional oil & gas business, Valero is leveraging its refining assets to expand the renewable energy portfolio. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Exxon Mobil vs Valero Energy: Industry Peers; Which Stock Is A Better Bet?

  1. Revenue Growth

Valero Energy’s growth was much stronger than Exxon Mobil’s before the pandemic, with Valero’s revenues expanding at an average rate of 13% from $75 billion in 2016 to $108 billion in 2019. Exxon Mobil’s revenues observed an 8% average growth rate from $208 billion in 2016 to $264 billion in 2019. Due to the pandemic, Valero and Exxon Mobil reported a 40% and 30% revenue contraction in 2020, respectively.

  • Valero Energy’s three operating segments, Refining, Renewable Diesel, and Ethanol contribute 95%, 1%, and 4% of total revenues, respectively. The company’s Refining segment is the key earnings contributor followed by the Renewable Diesel business.
  • In 2019, Valero redefined its long-term strategy to focus on emission reduction and expand its renewable diesel business by recognizing it as a reportable segment. The company is slated to invest $2 billion over the next three years to almost triple its renewable diesel capacity. Notably, Valero’s annual capital expenses have ranged within $2 -2.5 billion with 40% allocated toward the growth portfolio.
  • Exxon Mobil’s four operating segments, Upstream, Downstream, Chemical, Corporate & Other contribute 9%, 80%, 10%, and 1% of total revenues, respectively. However, the asset distribution is skewed toward the Upstream business which also generates a major chunk of earnings. The company’s Upstream, Downstream, Chemical, and Corporate & Other segments account for 65%, 18%, 11%, and 6% of total assets, respectively.
  • While other oil majors including BP and Royal Dutch Shell focus on expanding their renewable energy and mobility solutions businesses, Exxon Mobil’s capital allocation plan still focuses on its upstream portfolio. (related: A Closer Look At Royal Dutch Shell’s Energy Transition Strategy)

  1. Returns (Profits)
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Coming to returns, Exxon Mobil has consistently reported higher operating and net margins than Valero Energy. However, Valero did not incur impairment charges as its earnings depend on refining margins opposed to benchmark crude oil prices for Exxon Mobil. Thus, the net margin remained in the single-digit range even though it entered the negative territory.

  • In 2019, Exxon Mobil reported $265 billion in total revenues and $30 billion of operating cash flow at an operating cash flow margin of 11%. Subsequently, the company invested $24 billion in property, plant & equipment, returned $14 billion as dividends to shareholders, and raised $8 billion in long-term debt.
  • In 2019, Valero Energy reported $108 billion in total revenues and $5.5 billion of operating cash flow at an operating cash flow margin of 5%. The company invested $1.6 billion in property, plant & equipment, returned $1.5 billion as dividends to shareholders, and invested around $1 billion in joint ventures & acquisitions.
  • Exxon Mobil’s cash generation capabilities are significantly higher than Valero Energy as the downstream business operates at a thin margin. However, Exxon’s Upstream portfolio makes its earnings prone to oil price volatility.
  1. Risk

In 2020, Exxon Mobil and Valero Energy reported $47 billion and $9 billion of long-term debt, respectively. But, given the higher debt to equity ratio of Valero Energy, it is a riskier bet from the perspective of financial leverage.

  • Higher financial leverage coupled with continued revenue growth is a boon for generating surplus equity returns. However, interest expenses weigh on finances as revenues decline – limiting dividend payouts and capital expenses.
  • Per EIA, Brent benchmark is expected to average around $70/bbl in 2022 – lower than the current market price. However, the retail price of gasoline and diesel fuels is likely to remain high due to continued strain on fuel inventories and pent-up demand for transportation fuels.
  • Thus, downstream companies are likely to benefit from higher refinery margins as upstream companies increase production to recharge inventories and bridge the supply-demand gap.
  • Therefore, Valero Energy is likely to observe top line growth assisting cash flows and earnings in the near-term. (related: Why BP Stock Is A Good Alternative For Oil Investors)

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Dec 2021
MTD [1]
YTD [1]
Total [2]
 XOM Return 2% 47% -33%
 S&P 500 Return 5% 27% 113%
 Trefis MS Portfolio Return 2% 47% 297%

[1] Month-to-date and year-to-date as of 12/31/2021
[2] Cumulative total returns since 2017

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