Seeking Alpha
Long only, dividend growth investing, dividend investing, value
Profile| Send Message|
( followers)  

Before selecting a stock, there are a number of things that you need to consider in order to ensure that you are buying the stock of a high-quality company whose shares are poised to grow in value over time. Some of these concerns include what the company does, its competitive advantages, valuation, dividend payouts and sustainability, and earnings consistency.

Another important thing that you need to consider is the financial condition of the company in question. You want to know if the company is able to continue paying its bills, and how much debt it carries. The balance sheet is one of the most effective tools that you can use to evaluate a company's financial condition. In this article, I will discuss the balance sheets of ExxonMobil XOM and Chevron CVX, in order to get some clues as to how well these companies are doing.

I will go through the balance sheets of these two companies, reviewing the most important items, and seeing if there are any major differences between the two, making one a better investment than the other. Information that I used on ExxonMobil can be found here, and information on Chevron can be found at this link. Note that this article is not a comprehensive review as to whether either of these two stocks should be bought or sold, but rather, just an important piece of the puzzle when doing the proper due diligence.

This article might be a bit too basic for some and too long-winded for others, but I hope that some of you can derive benefit from it.

Background

ExxonMobil is involved in the exploration, production, transportation, and sale of crude oil, natural gas, and other petroleum products. It also manufactures and sells commodity plastics such as polyethylene and polypropylene, along with other specialty products that are derived from petroleum.

The company splits its operations into three segments. They are upstream, downstream, and chemical. Upstream activities include the exploration, production, and transportation of oil and natural gas. The downstream segment manufactures and sells petroleum products. Downstream activities include refining and other manufacturing activities as well as distributing fuels, lubricants, and other products and feedstocks. The chemical segment manufactures and sells petrochemicals, like the plastics that were mentioned above.

ExxonMobil recorded $483B in sales over 2012, and has a market capitalization of $402B. 67% of the company's earnings in 2012 came from upstream activities, and 79% of their earnings came from outside the United States.

Chevron is involved in many of the same activities as ExxonMobil, through its subsidiaries. Like ExxonMobil, it splits operations between upstream and downstream activities. The upstream activities include exploring, developing, and producing crude oil and natural gas. They also include the transportation of oil through pipelines, and the processing, transportation, storage, and marketing of natural gas. The downstream activities include refining the oil into petroleum products and selling crude oil and refined products under the brand names of Chevron, Texaco, and Caltex. These operations also include transporting these items by pipelines, marine vessels, and rail car. It also produces and sells commodity petrochemicals like plastics as well as additives for fuel and lubricants.

In 2012, Chevron recorded $242B in sales, and the company has a market capitalization of $227B. 72% of sales come from downstream activities, while 60% of sales come from outside the United States.

Cash and Cash Equivalents

The first line in the Assets column of the balance sheet is for the amount of cash and cash equivalents that the company has in its possession. Generally speaking, the more cash the better, as a company with a lot of cash can invest more in acquisitions, repurchase stock, and pay out dividends. Some people also value stocks according to their cash positions. Some of the larger and more mature companies tend not to carry a lot of cash on their balance sheets, as they might be more inclined to buy back stock with it, or pay out dividends.

At the end of 2012, ExxonMobil reported cash and cash equivalents of $9.92B. The company paid out $10.1B in dividends and spent $20.9B on stock buybacks at an average price of $86.48. In 2012, the company generated $21.9B in free cash flow.

Chevron reported $21.9B in cash and short-term investments at the end of 2012. That's a lot of cash for a company that has a market capitalization of $227B. That means that the company's stock is trading for just over 10 times its cash position, which may make it attractive to value-oriented investors. During 2012, the company paid out $6.84B in dividends, and spent $4.14B on buybacks. It generated free cash flow of $7.9B.

The table below illustrates this information pretty clearly. Chevron trades at a more attractive multiple relative to its cash position and pays a better dividend yield. ExxonMobil, on the other hand, bought back an amount of stock that equals more than 5% of its market capitalization in 2012.

Symbol

Market Cap.

Cash Position

Dividend Payouts (NYSE:TTM)

Buyback Amount

Free Cash Flow

XOM

$402B

$9.92B

$10.1B

$20.9B

$21.9B

CVX

$227B

$21.9B

$6.84B

$4.14B

$7.9B

Table 1: Cash Positions and What ExxonMobil and Chevron Do With Their Cash

Net Receivables

Receivables constitute money that is owed to a company for products or services that have already been provided. Of course, the risk with having a lot of receivables is that some of your customers might end up not paying. For this reason, you usually like to see net receivables making up a relatively small percentage of the company's sales.

ExxonMobil had $35.0B in receivables on its balance sheet, equal to 7.25% of its 2012 sales. This percentage was inline with the 7.94% of sales that it recorded in 2011, and the 8.43% that it recorded at the end of 2010.

Chevron reported $21B in receivables, equal to 8.68% of its revenue for 2012. This was inline with percentages of 8.58% and 10.1% for 2011 and 2010, respectively.

Given the relatively low percentage of sales that are receivables and the consistency of these numbers over the last couple of years, I don't see anything to worry about here for either of these two companies.

Current Ratio

Another factor that I like to look at is the current ratio. This helps to provide an idea as to whether or not the company can meet its short-term financial obligations in the event of a disruption of operations. To calculate this ratio, you need the amount of current assets and the amount of current liabilities. Current assets are the assets of a company that are either cash or assets that can be converted into cash within the fiscal year. In addition to cash and short-term investments, some of these assets include inventory, accounts receivable, and prepaid expenses. Current liabilities are expenses that the company will have to pay within the fiscal year. These might include short-term debt and long-term debt that is maturing within the year, as well as accounts payable (money owed to suppliers and others in the normal course of business). Once you have these two figures, simply divide the amount of current assets by the amount of current liabilities to get your current ratio.

If a company's operations are disrupted due to a labor strike or a natural disaster, then the current assets will need to be used to pay for the current liabilities until the company's operations can get going again. For this reason, you generally like to see a current ratio of at least 1.0, although some like to see it as high as 1.5.

The current ratio of ExxonMobil is 1.01, while Chevron sports a current ratio of 1.63. While both of these figures suggest that each company has enough cash and other current assets on hand to meet its short-term financial obligations, even in the event of a disruption to operations, I give the edge to Chevron in this department due to its significantly higher current ratio.

Property, Plant and Equipment

Each of these two companies has capital expenditures that are associated with property, plant and equipment. The oil and gas business is a very capital-intensive business that requires huge investments in machinery, equipment, and infrastructure.

Right now, ExxonMobil has $227B in property, plant, and equipment on its balance sheet. This figure is higher than the $215B that it reported one year before. This increase is due to investments that the company made in exploration activities in the Gulf of Mexico, as well as in projects in Canada, Australia, and Papua New Guinea. 80% of their assets in this department are used for upstream activities, with 90% of them being classified as machinery and equipment.

Chevron reported $141B in property, plant, and equipment at the end of 2012. This is higher than the $123B that they reported a year ago, due to increased investment in their upstream activities. 87% of the company's assets here are devoted to upstream activities. There is a significant degree of geographic diversification of the company's property, plant, and equipment, with 37% of it in the United States, 15% in Australia, and 12% in Nigeria. Other than that, no country accounts for more than 10% of Chevron's property, plant, and equipment assets.

Goodwill

Goodwill is the price paid for an acquisition that's in excess of the acquired company's book value. The problem with a lot of goodwill on the balance sheet is that if the acquisition doesn't produce the value that was originally expected, then some of that goodwill might come off of the balance sheet, which could, in turn lead to the stock going downhill. Then again, acquisitions have to be judged on a case-by-case basis, as good companies are rarely purchased at or below book value.

For the reason discussed above, I generally don't like to see goodwill account for more than 20% of a company's total assets. However, this is not a problem for either of these two companies, as ExxonMobil doesn't have any goodwill on its balance sheet, and Chevron's goodwill only accounts for about 2% of its total assets. So, there is no need to be concerned about the negative effects of any impairments to goodwill on either company's stock.

Intangible Assets

Intangible assets that are listed on the balance sheet include items such as licensed technology, patents, brand names, copyrights, and trademarks that have been purchased from someone else. They are listed on the balance sheet at their fair market values. Internally-developed intangible assets do not go on the balance sheet in order to keep companies from artificially inflating their net worth by slapping any old fantasy valuation onto their assets. Many intangible assets like patents have finite lives, over which their values are amortized. This amortization goes as annual subtractions from assets on the balance sheet and as charges to the income statement. If the company that you are researching has intangible assets, with finite lives, that represent a very large part of its total asset base, then you need to be aware that with time, those assets are going to go away, resulting in a reduction in net worth, which may result in a reduction in share price, unless those intangible assets are replaced with other assets.

However, like goodwill, this is not a problem for either company, as neither one reports any significant number of intangible assets. So, impairment of intangible assets will not affect either company.

Return on Assets

The return on assets is simply a measure of the efficiency in which management is using the company's assets. It tells you how much earnings management is generating for every dollar of assets at its disposal. For the most part, the higher, the better, although lower returns due to large asset totals can serve as effective barriers to entry for would-be competitors. The formula for calculating return on assets looks like this:

Return on Assets = (Net Income) / (Total Assets).

For ExxonMobil, the return on assets would be $44.9B in core earnings, divided by $334B in total assets. This gives a return on assets for 2012 of about 13.4%. This is slightly higher than the 12.4% and the 10.1% that the company reported for 2011 and 2010, respectively. We should also keep in mind that the asset base of $334B, represents a very strong barrier to entry for would-be competitors.

For Chevron, the return on assets for 2012 was 11.2%, which is below the 12.9% that it reported at the end of 2011, but above the 10.3% that the company reported at the end of 2010. The reason for Chevron's decline in 2012 is due to a less than 3% drop in earnings versus 2011, and an 11% increase in the company's asset totals. The company attributes the drop in its earnings to lower realized prices. Chevron also has a respectable asset base of $233B, which makes for a strong barrier to entry.

In the table below, you can see how the returns on assets of both companies have changed over the last couple of years. ExxonMobil gets the edge here, as its returns on assets have been steadily moving up. However, Chevron's numbers here are also respectable.

Symbol

2012

2011

2010

XOM

13.4%

12.4%

10.1%

CVX

11.2%

12.9%

10.3%

Table 2: Returns On Assets From ExxonMobil And Chevron

Short-Term Debt Versus Long-Term Debt

In general, you don't want to invest in a company that has a large amount of short-term debt when compared with the company's long-term debt. If the company in question has an exorbitant amount of debt due in the coming year, then there may be questions as to whether the company is prepared to handle it.

ExxonMobil is carrying $3.65B in short-term debt. This figure is dwarfed by the company's free cash flow of almost $22B. Chevron is carrying an almost negligible $127M of short-term debt on its balance sheet.

Long-Term Debt

Long-term debt is debt that is due more than a year from now. However, an excessive amount of it can be crippling in some cases. For this reason, the less of it, the better. Companies that have sustainable competitive advantages in their fields usually don't need much debt in order to finance their operations. Their earnings are usually enough to take care of that. A company should generally be able to pay off its long-term debt with 3-4 years' worth of earnings.

Right now, ExxonMobil is carrying $7.93B of long-term debt, compared with the $9.32B reported at the end of 2011, and $12.2B that was reported at the end of 2010. Of the $7.93B in long-term debt, approximately $2.89B is due within the next five years, with the rest of it not due for another six years or more.

Chevron currently has $12.0B worth of long-term debt, versus $9.68B from one year ago, and $11.3B from the year before that. Of the $12.0B in long-term debt, only $2.0B is due within the next five years.

The table below illustrates the long-term debt figures for both companies and how they have changed over the last couple of years.

Symbol

2012

2011

2010

XOM

$7.93B

$9.32B

$12.2B

CVX

$12.0B

$9.68B

$11.3B

Table 3: Long-Term Debt At ExxonMobil And Chevron

ExxonMobil's long-term debt is moving in the right direction, as the company seems to be paying it down. Chevron had a bit of a jump over the past year.

In determining how many years' worth of earnings it will take to pay off the long-term debt, I use the average of each company's core earnings over the last 3 years. The average earnings of ExxonMobil over this period is $38.8B. The 3-year average for Chevron is $24.0B. When you divide the long-term debt by the average earnings of each company, here is what we find.

Years of Earnings to Pay off LT Debt = LT Debt / Average Earnings

For ExxonMobil, here is how it looks: $7.93B / $38.8B = 0.20 years

For Chevron, it looks like this: $12.0B / $24.0B = 0.5 years

Both of these companies are in excellent condition here. Each company can pay off its long-term debt with an amount that's equal to less than one year of earnings. The cash position of each company is bigger than its long-term debt obligation.

While ExxonMobil is slightly better when it comes to long-term debt, Chevron is excellent too.

Treasury Stock

In the equity portion of the balance sheet, you will find the treasury stock. This figure represents the shares that the company in question has repurchased over the years, but has yet to cancel, giving the company the opportunity to re-issue them later on if the need arises. Even though treasury stock appears as a negative on the balance sheet, you generally want to see a lot of treasury stock, as strong, fundamentally-sound companies will often use their huge cash flows to buy back their stock. For this reason, I will usually exclude treasury stock from my calculations of return on equity and the debt-to-equity ratio in the case of historically-strong companies, as the negative effect of the treasury stock on the equity will make the company in question appear to be mediocre, or even severely distressed, when doing the debt-to-equity calculation, when in reality, it might be a very strong company.

ExxonMobil has a whopping $197B worth of treasury stock on its balance sheet, while Chevron has $33.9B.

Debt-To-Equity Ratio

The debt-to-equity ratio is simply the total liabilities divided by the amount of shareholder equity. The lower this number, the better. Companies with sustainable competitive advantages can finance most of their operations with their earnings power rather than by debt, giving many of them a lower debt-to-equity ratio. I usually like to see companies with this ratio below 1.0, although some raise the bar (or lower the bar if you're playing limbo) with a maximum of 0.8. Let's see how ExxonMobil and Chevron stack up here.

Debt To Equity Ratio = Total Liabilities / Shareholder Equity

For ExxonMobil, it looks like this: $162B / $166B = 0.98

For Chevron, it looks like this: $95.2B / $137B = 0.69

The table below shows this figures for both companies over the last couple of years.

Symbol201220112010
XOM0.981.101.02
CVX0.690.720.76

Table 4: Debt-To-Equity Ratios At ExxonMobil And Chevron

From this, you can see that Chevron has a consistently lower debt-to-equity ratio than ExxonMobil. However, this calculation did not strip out the negative effects of either company's huge treasury stock position.

A variation of this ratio that I like to use takes into account the presence of treasury stock on the balance sheets of very strong companies. When there is a large amount of treasury stock on the balance sheet, the regular debt-to-equity ratio can make a very strong company appear as a mediocre, or even a severely distressed company. Here, I add the treasury stock back in to the equity, as treasury stock can be re-issued at a later date if the need arises (although you hope that never happens). I call this ratio the adjusted debt-to-equity ratio. It's calculated like this.

Adjusted Debt To Equity Ratio = Total Liabilities / (Shareholder Equity + Treasury Stock)

For ExxonMobil, it looks like this: $162B / $363B = 0.45

For Chevron, it looks like this: $95.2B / $171B = 0.56

In the table below, you can see how this figure has changed over the last couple of years.

Symbol201220112010
XOM0.450.510.49
CVX0.560.580.61

Table 5: Adjusted Debt-To-Equity Ratios Of ExxonMobil And Chevron

From this table here, ExxonMobil's debt-to-equity ratios are slightly lower than Chevron, although both are very good in this department. The only reason why ExxonMobil has a lower adjusted debt-to-equity ratio than Chevron is the fact that I stripped out the negative effect that ExxonMobil's huge amount of treasury stock has on the equity.

Return On Equity

Like the return on assets, the return on equity helps to give you an idea as to how efficient management is with the assets that it has at its disposal. It is calculated by using this formula.

Return On Equity = Net Income / Shareholder Equity

Generally speaking, the higher this figure, the better. However, it can be misleading, as management can juice this figure by taking on lots of debt, reducing the equity. This is why the return on equity should be used in conjunction with other metrics when determining whether a stock makes a good investment. Also, it should be mentioned that some companies are so profitable that they don't need to retain their earnings, so they buy back stock, reducing the equity, making the return on equity higher than it really should be. Some of these companies even have negative equity on account of buybacks. For this reason, I also strip out the effect of treasury stock here, when I calculate the adjusted return on equity.

For now, let's just calculate the normal return on equity.

So, the return on equity for ExxonMobil is as follows:

$44.9B / $166B = 27.0%

The return on equity for Chevron is:

$26.2B / $137B = 19.1%

In the table below, you can see how the return on equity has fared over the past couple of years for both companies.

Symbol201220112010
XOM27.0%26.7%20.7%
CVX19.1%22.2%18.1%

Table 6: Returns On Equity From ExxonMobil And Chevron

To strip out the negative effects of treasury stock, I calculate what I call the adjusted return on equity.

Adjusted Return On Equity = Net Income / (Shareholder Equity + Treasury Stock)

For ExxonMobil, it comes out as: $44.9B / $363B = 12.4%

For Chevron, it looks like this: $26.2B / $171B = 15.3%

In the table below, you can see how this figure has changed over time for both companies.

Symbol201220112010
XOM12.4%12.4%10.0%
CVX15.3%17.8%14.5%

Table 7: Adjusted Returns On Equity At ExxonMobil And Chevron

From looking at tables 6 and 7, it can be seen that ExxonMobil looks superior when calculating the normal return on equity. However, this is only because ExxonMobil has reduced its equity position by buying back so much stock. When you take that out of the equation, Chevron actually looks a bit better here.

Retained Earnings

Retained earnings are earnings that management chooses to reinvest into the company as opposed to paying it out to shareholders through dividends or buybacks. It is simply calculated as:

Retained Earnings = Net Income - Dividend Payments - Stock Buybacks

On the balance sheet, retained earnings is an accumulated number, as it adds up the retained earnings from every year. Growth in this area means that the net worth of the company is growing. You generally want to see a strong growth rate in this area, especially if you're dealing with a growth stock that doesn't pay much in dividends or buybacks. More mature companies, however, tend to have lower growth rates in this area, as they are more likely to pay out higher dividends.

ExxonMobil reported a whopping $366B in retained earnings at the end of 2012. This is a lot of money that the company can plow back into its operations for more growth. This figure compares with $277B that the company reported in 2009. Retained earnings at ExxonMobil grew at a cumulative rate of 32% since 2009.

Chevron reported $160B in retained earnings at the end of 2012. This compares with the $106B that it reported at the end of 2009. So, retained earnings at Chevron have grown by 51% since the end of 2009.

The table below shows how the retained earnings at both companies have changed over the last few years.

Symbol

2012

2011

2010

2009

XOM

$366B

$331B

$299B

$277B

CVX

$160B

$140B

$120B

$106B

Table 8: Retained Earnings At ExxonMobil And Chevron

So, as far as growth in retained earnings is concerned, Chevron is the winner here, although ExxonMobil looks pretty good too.

Conclusion

After reviewing the balance sheets of both ExxonMobil and Chevron, there is a lot to like about each company. Both of them have substantial cash positions, huge asset totals that present barriers to entry for would-be competitors, decent returns on assets and equity, and manageable debt positions.

ExxonMobil has slightly better returns on assets, a smaller amount of long-term debt relative to the company's earnings, and lower adjusted debt-to-equity ratios.

Chevron has a bigger cash position and trades at a much more attractive valuation relative to that cash position. It pays a higher dividend yield, and has a superior current ratio. It has also shown better growth in retained earnings, and higher adjusted returns on equity.

While it is true that BOTH of these companies are in EXCELLENT financial condition, I'm going to give the edge to Chevron for the reasons discussed above. However, if you like a company that is more generous with buybacks, then ExxonMobil may be more appropriate for you.

Source: Battle Of The Big Oils: Which Has The Better Balance Sheet, Exxon Mobil Or Chevron?