Exxon Mobil (XOM) and Chevron (CVX) are two oil giants that are almost perfectly managed. The big question is which one constitutes the most profitable investment at the moment. In this article I will compare the two companies in order to reach a verdict.
Exxon Mobil reported earnings $45 B in 2012, which corresponds to earnings per share $9.70. This means that the company achieved 4.4 times the EPS of 2001 and 7% higher EPS than those at the peak of the previous economic cycle (2008). During the 11-year period, the company approximately tripled its book value from $11.1 to $34.7/share.
Chevron reported earnings $26 B in 2012, which corresponds to EPS 13.32. Therefore, the company achieved 7.1 times the EPS of 2001 and 11% higher EPS than those of 2008. During the 11-year period, the company more than quadrupled its book value from $16.2 to $69.4/share (data here).
As of the close of February 8th, Exxon has a higher price to book value ratio than Chevron (2.4 vs. 1.7). On the other hand, Exxon and Chevron have similar P/E ratios (9.1 and 8.7, respectively) so this cannot be used as a distinguishing factor between the two companies. Nevertheless, it is remarkable that these are quite low P/E ratios and are mainly due to the market perception that the oil price cannot go much higher from its current levels. However, Barclays projects a surging oil price in the next months (source: Barclays) while there is always the "wild card" of a military intervention in Iran, which would send the oil price to the… sky. Therefore, the current valuations of Exxon and Chevron may prove quite profitable investments.
Production and oil reserves
About 90% of the earnings of Chevron, Exxon and most oil companies comes from the upstream sector. Therefore, the depletion of oil reserves is one of the most significant problems of these companies and hence it is critical for them to replenish their reserves. In 2012, Chevron reduced its oil equivalent production by 2% while Exxon reduced its oil equivalent production by a disappointing 5.5%. Moreover, Chevron sufficiently replenished its reserves, as it discovered new reserves that were 112% its annual production. Exxon Mobil did not provide such data in its annual report of 2012 but it replenished its reserves by 119% in 2011.
At the end of 2011, Exxon Mobil had proven reserves of 24.9 B barrels of equivalent oil while Chevron had 11.2 B barrels of equivalent oil. Based on these figures and their last year's consumption of reserves, if the two companies were not to discover any new reserves at all, Exxon Mobile would deplete its reserves in 15 years whereas Chevron would deplete them in 11.5 years.
In 2012, Exxon Mobil earned a net income $27.3/barrel of oil equivalent while Chevron earned a net income $23.7/barrel of oil equivalent.
In the end of Q3-2012, the net debt of Exxon stood at $118 B, which is equivalent to 3 years' earnings, while the net debt of Chevron stood at $50 B, which corresponds to 2 years' earnings. This data reveals that both companies bear an exceptionally low amount of debt compared to their earnings, thus confirming their reputation as extremely powerful cash-flow generators.
Distribution to shareholders
In reference to the distribution of earnings to their shareholders, the two companies follow quite different policies. Exxon distributes 2/3 of its earnings, while Chevron distributes about half of its earnings. In addition, Exxon prefers executing share repurchases to paying dividends, with a ratio 2:1, whereas Chevron prefers paying dividends to performing share repurchases, with a ratio 1.4:1.
The total return to shareholders in 2012 was about 8% for Exxon and 5.5% for Chevron. This explains the somewhat higher growth rate and lower debt level of Chevron. However, in my opinion, as the debt of both companies is pronouncedly low, the distribution policy is a very important advantage of Exxon vs. Chevron. Exxon manages to withdraw about 5% of its shares every year, which means that it could withdraw all of its shares in 20 years. Of course this will become difficult, as the share price will greatly increase thanks to the diminishing number of shares, but this is the best an investor should hope for.
Chevron has demonstrated a somewhat better performance in terms of growth and has double lifetime of proven reserves compared to Exxon. In addition, it follows a more conservative strategy than Exxon, distributing less cash to its shareholders and keeping its debt at lower levels than Exxon. However, as the differences in all the above parameters are not very pronounced (with the exception of oil reserves), I would prefer Exxon thanks to its aggressive share repurchase program. Nevertheless, the final choice depends on the preferences of the individual investor and whether one prefers prompt shareholder distributions (Exxon) or future capital gains (Chevron).