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Summary

  • Chevron and Exxon Mobil provide the best metrics among the supermajors.
  • Chevron has superior growth prospects.
  • Chevron also offers a favorable P/E and dividend yield compared to Exxon Mobil.

Chevron (NYSE:CVX) is a San Ramon, Calif.-based oil and gas corporation engaged in the up-, mid- and downstream industry and active in more than 180 countries.

The Five Supermajors

In this article I will compare Chevron to the other supermajors -- Exxon Mobil (NYSE:XOM), BP (NYSE:BP), Royal Dutch Shell (NYSE:RDS.A) and Total (NYSE:TOT) -- and assess why it is the best pick among these oil and gas players. In the table below, you can see how Chevron compares to its competitors in four metrics I consider to be important (I will explain the reasons later on).

Profit MarginROIDebt/EquityReplacement ratio
Chevron9.1%7.90%0.15120%
Exxon Mobil8.0%8.20%0.12110%
BP2.7%4.40%0.4166%
Shell2.9%4.85%0.2595%
Total5.6%6.10%0.4877%

Source: Replacement Ratio numbers taken from Chevron investor presentation (page 57); Profit Margin and Debt/Equity numbers taken from finviz.com.

Profit Margin

Chevron offers the highest profit margin of these five oil and gas companies. This is a large advantage: Chevron needs to produce and sell about one barrel of oil in order to net $10, whereas its competitors need to produce and sell much more oil for the same profit -- about three times the number for BP and Shell, twice the number for Total. Exxon offers the second best profit margin, just slightly below Chevron's. This higher consumption for the same profit means that Chevrons competitors need to put more effort and money into replacing oil reserves.

ROI

The ROI measures how profitable a company invests money. A higher ROI means that the net return is higher for the same amount of money invested by the company. Again, Chevron and ExxonMobil are leading in this metric, earning about twice as much as the other three for the same amount of money put into use.

Debt/Equity

This metric, comparing a company's debt to its equity, shows how leveraged a company is. Higher leverage usually means higher interest rates and a riskier investment. The higher leverage of Chevron's peers (except for Exxon Mobil) also makes them vulnerable to generally rising interest rates.

Replacement Ratio

The last metric measures the amount of proved reserves added to a company's reserves during one year compared to the production during that year. A replacement ratio above 100% means the company's reserves are growing, while below 100% means the company is continuously reducing its reserves. Chevron offers the highest replacement ratio at 120% (for each 10 barrels produced the company finds and adds 12 barrels to its reserves), with Exxon a close second. The other three competitors offer replacement ratios below 100% -- meaning they have to expand search and exploration in the future if they don't want to run out of oil eventually. This need for additional search will cost them money and thus further weaken their already low margins.

Chevron and Exxon dominate this comparison, both coming in as first in two metrics and as second in the other two, with all in all very similar numbers. These two obviously are the best picks out of the five companies.

Chevron or Exxon?

I still prefer Chevron over Exxon for a couple of other reasons:

Chevron currently has more projects running, which will expand production, cash flow and earnings. The most notable ones are the Gorgon and Wheatstone LNG projects in Western Australia (Shell and Exxon both own minority stakes in these projects) and some Gulf of Mexico projects (Jack/St. Malo, Big Foot, and Tubular Bells). Chevron is also very well positioned in the Permian Basin. These and a couple of other projects are expected to push Chevron's production by 20% until 2017. Once these projects are up and running, Chevron will have more cash available for share repurchases and more dividend increases (although Chevron has already doubled its dividend since 2006).

Exxon doesn't plan to expand its production like that and invests a higher proportion into share buybacks instead of new projects. I personally prefer Chevron's way since the new projects are high-margin legacy projects, meaning they have very long run times (up to 60 years), slow declines, and will definitely strengthen the company's portfolio.

When also accounting for Chevron's higher dividend yield and lower P/E, Chevron seems to be the better pick among these two. Exxon Mobil is still a great company and can be added to diversify one's oil and gas investments.

Summary

Chevron and Exxon Mobil are way better investments than the other three supermajors, leading in all four metrics examined here. Chevron also has the best growth prospects and project portfolio, and should be considered the best oil and gas investment right now -- although Exxon Mobil isn't a bad investment at all and could be added to your portfolio for diversification.

Disclosure: The author is long CVX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.