Oil behemoths Chevron Corp. (ticker: CVX) and Exxon Mobil Corp. (XOM) have struggled in 2020 as the beaten-down sector faced many challenges as demand shrunk rapidly this spring, tanking crude oil prices.
The glut in oil supply remains high and recovery remains weak as many businesses stay closed and jet fuel demand continues historically low. Consumption rates rebounded during the summer, but the global oversupply of oil compounds the industry’s problems. Oil prices dipped again recently and are hovering around $40 a barrel.
Both oil companies are good buys for their traditional base of investors who seek yield and dividends, says Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business.
“Large integrated majors have a greater portion of retail investors than other oil stocks,” he says.
Exxon’s current dividend yield is about 10.2%, while Chevron’s is around 7%.
Exxon Exits Dow
A blue-chip stock, Exxon was removed from the Dow Jones Industrial Average on Aug. 31 after being on the benchmark index since 1928, when it was known as Standard Oil. Exxon was removed after Apple (APPL) chose to split its stock.
Exxon has “probably been beat down a little more in terms of its price due to its exit from the Dow Jones,” Bullock says. “Over the long run, it shouldn’t make a great deal of difference but may offer slightly more upside on the share price.”
Chevron is now the only energy company in the Dow, which is composed of 30 large U.S. companies from various sectors.
While it is prestigious for a company to be included in the Dow, since the energy sector is now a smaller portion of the S&P 500, the removal of an energy stock from the benchmark was inevitable for the current state of the industry, he says.
Both Exxon and Chevron are paying out approximately 80% of their cash flow to dividends, though it may be more or less in a given quarter, Bullock says.
“To meet total cash needs, they will likely access debt or short-term paper markets to fund ongoing capital needs,” he says.
Exxon could struggle to pay its dividend yield in the future and gave a preview of its earnings results on Oct. 1. The company said it is likely to lose money from its production business even though oil prices have risen, and weaker prices for its refined products could also impact its profit margin by $200 million to $600 million. The stock will likely miss estimates from stock analysts when it reports earnings for the third quarter.
Exxon’s stock reached a low of $30.11 in March as many businesses ground to a halt and shut down. The stock has been volatile and closed at $33.74 on Oct. 5. Chevron’s also reached a low in March when it fell to $51.60 but rebounded to $72.70 as of Oct. 5.
Challenges for Exxon
Exxon’s stock has underperformed Chevron by about 12% over the past six months and sells at a premium valuation compared with Chevron, says Michael Underhill, chief investment officer of Capital Innovations in Pewaukee, Wisconsin.
Chevron has a stronger balance with lower net debt/earnings before interest, taxes, depreciation and amortization of 0.8 versus 1.7 times for Exxon based on 2021 estimates, he says. Chevron has a positive free cash yield in 2020 compared with a deficit for Exxon. That gap closes based on 2022 estimates to 7.2% for Exxon and 8.5% for Chevron.
Exxon is facing many challenges, and investors have been concerned about the company’s high capital spending plans with a previous guidance at $30 billion to $35 billion per year but has lowered it by 42% from early 2020 guidance.
“Even with these reduced capital expenditure guidelines, Exxon would need Brent crude oil prices to reach $65 a barrel, draw down cash or sell some assets to maintain distribution organically through the next five years,” Underhill says.
Chevron is also facing headwinds since its West Coast refining operations are under pressure, and there will be further cuts in its Permian Basin production, he says.
Exxon’s stock generates greater total return potential compared to Chevron from its current prices, and a return to the 50-day moving average over the next year would provide a 28% total return, Underhill says.
“The sentiment is very negative currently on Exxon and energy equities with oil prices dropping modestly over the past month, questions about global demand stalling, poor jet fuel demand prospects and refining margins under pressure,” he says. “The past 30-day performance of Exxon is one of the worst 30-day periods in the company history.”
Both of these companies tend to focus on a U.S. investor base whose primary focus is returns with environmental, social and corporate governance, or ESG, considerations and renewables a second but important priority, Bullock says. For the European majors, the priorities are the opposite for their investor base, and they are limiting capital to hydrocarbons while ramping it up to renewables.
“While our use of renewables will grow, natural gas use is forecasted to grow globally and oil to remain flat to slightly up,” he says. “This will allow Chevron and Exxon to supply a greater share of the world’s hydrocarbons going forward, which bodes well for both stocks.”
The consensus from analysts is a “hold” on Exxon with four “buy,” 18 “hold” and four “sell” ratings. Chevron is rated “overweight” with 15 “buy,” two “overweight,” eight “hold” and one “sell” rating.