Based on financial and operating performance metrics, I drilled into the endless debate as to which company should trade at a premium to the other between Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM). I based my performance metrics on data from the company's annual 10-K reporting of their Supplementary Oil & Gas - FASB 69 information. Supplementary Oil & Gas data is an upstream only disclosure based on the FASB 69 ruling as required by the Securities Exchange Commission. It captures the following data:
- Proved oil and gas reserve quantities
- Capitalized costs relating to oil and gas producing activities
- Costs incurred in oil and gas property acquisition, exploration, and development activities
- Results of operations for oil and gas producing activities
- A standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities
Production and Reserve Growth:
I looked at data over a thirteen-year period from 2004 to 2016 to get a long-term comparison of their upstream financial and operating performance. See Table below. The results were startling. Whether comparing CVX and XOM from a financial or operating basis there was no clear-cut advantage between the two. The difference in nearly all cases was minor.
From 2004 to 2016, on a per annum basis oil declined slightly by roughly 1% for CVX and XOM. Over the same period, likewise on a per annum basis natural gas increased 2% for CVX, and declined 1.5% for XOM. Combined oil & gas production was flat for CVX and down by 1% for XOM.
For both companies their oil & gas reserves combined recorded no growth from 2004 to 2016. Due to its slightly larger size, XOM has a longer oil & gas reserve life as measured by a multiple of reserves to production ratio - R/P. The oil & gas R/P ratio for CVX is 10.1, for XOM it is 13.4.
Production Replacement: Ratios and Cost
Next, we compared the ability and cost efficiency of each company to replace production through two key metrics:
- Reserve Replacement Cost - RRC: is production replacement through exploration - drill-bit and through reserve acquisition.
- Finding & Development Cost - F&D: is production replacement solely through exploration prowess- drill-bit.
On average from 2004 to 2016, XOM had a better oil production replacement ratio through its reserve replacement growth - RR and F&D replacement than CVX; however, for both companies oil production replacement was below 100% indicating that neither company replaced 100% of their production. Over the comparable period, CVX had a better natural gas production replacement than XOM. CVX replaced gas production better than 100% through either RR or F&D. XOM replaced gas production better than 100% only through acquisitions not through exploration prowess.
On a F&D basis from 2004 to 2016, the results were the same on an exploration - drill-bit basis as when reserve acquisitions were included in the above RR table.
On average from 2004 to 2016, XOM had the lower production replacement cost metrics on a combined oil & gas barrel of oil equivalent - boe: a six to one ratio of oil to gas based on each hydrocarbon's Btu value.
We compared upstream revenue and production growth, and again the results were mixed.
From 2004 to 2016, oil & gas revenue showed no growth for CVX, but inched lower at 2% for XOM on a per annum basis.
Production costs on a per annum basis over the comparable period was a 1% difference between the two companies. CVX posted a 7.9% increase, while XOM recorded a 6.7% increase per annum growth rate from 2004 to 2016.
However, when we compared the dollar amount of revenue and production costs divided by their respective oil & gas production we see a slightly different picture. We divided revenue by production to normalize the comparison to account for the greater volume of production by XOM.
Over the comparable period, CVX recorded a higher revenue per boe of production than XOM due to its higher oil price realization. Although CVX has a higher production cost per boe, CVX had a higher netback between the two companies. Netback is defined as revenue less production costs.
We examined each companies' ability to generate cash flow to replace production. This is called the recycle multiple or netback divided by RRC. On average from 2004 to 2016, the recycle ratio revealed an edge to XOM over CVX, 1.9X to 1.7X, respectively.
However, on a strict cash flow per boe produced basis, CVX had an edge over XOM on average from 2004 to 2016, $24.62/boe to $20.26/boe, respectively. Again this is attributable to CVX's higher oil price realization.
Finally, a return on revenues or sales, CVX had a slight 2% edge over XOM overall over the comparable period from 2004 to 2016.
Source: Company 10-K.
We could continue to look at other metrics, and I did do so. But repeating them here adds no additional or discriminating value. The net result is that between both companies there is no clear upstream financial or operating performance advantage separating the two. Each has a formidable balance sheet and operates globally, they are evenly balanced.
Indeed, if you look at their forward price to earnings - P/E ratio, both are almost dead even; an 18.17 multiple for CVX and 17.65 multiple for XOM. XOM, does have a larger market capitalization of roughly $340 billion to CVX's $203 billion. XOM's larger market capitalization is attributable to its larger upstream business, and its much larger downstream and petrochemical businesses.
I looked at an equity share comparison, and found that on a five-year comparison, CVX outperformed XOM +2.5% to -4%, respectively. In chart below, CVX is represented in orange, XOM in Blue.
Source: Seeking Alpha
Over a one year comparison CVX's equity out performance over XOM's shares widened to nearly +14% for CVX and -1% for XOM. In chart below, CVX is represented in orange, XOM in Blue.
Source: Seeking Alpha
More recently, on a year-to-date comparison, CVX's share performance relative to XOM has narrowed again to both down nearly 8%. In chart below, CVX is represented in orange, XOM in Blue.
Source: Seeking Alpha
One can argue, that past performance is not indicative of future success and I agree with that. One can continue to argue as to which company will grow their production faster. Oil companies' equity shares are primarily driven by production growth, not surprisingly financial returns. But, each company operates in essentially the same basins worldwide. They both operate in U.S. unconventional onshore shale basins, and each has a significant position in the Permian basin. Overall it is not too surprising that the difference between each company's financial and operating performance is relatively narrow over time.
Push come to shove, my preference between the two is Chevron as I discussed in my article released February 24, 2017 titled "For Big Oil, Chevron is Best Levered to Oil Price Recovery". Particularly, CVX has an above average weighting of oil in their portfolio as oil prices turn higher in the near-term and an established presence in the Permian basin. XOM will also perform well in a higher oil price environment.
Below is a stock chart of CVX and XOM over the last five days,. In the chart below, CVX is represented in orange, XOM in Blue. No surprise, both are performing relatively the same.
Source: Seeking Alpha
In the next series of articles, I will examine other peer comparisons of financial and operating metrics between BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), Total (NYSE:TOT) and ENI (NYSE:E), Chevron and Total , Exxon Mobil and Royal Dutch Shell . We will also look at how Statoil (NYSE:STO) and ConocoPhillips (NYSE:COP) have fared individually on the same metrics.
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Disclaimer: Please do your own research on the company's SEC filings, press releases and any relevant information to determine whether this company is suitable for your investment risk profile. The reader should contact a qualified investment advisor. I am not a registered investment advisor, and this article is not an advice to buy or sell stock in any company. I am not responsible for investment decisions you make.
Disclosure: I am/we are long CVX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.