BP (NYSE: BP) shortened its name from British Petroleum, which was what this integrated oil giant was known as when the Deepwater Horizon disaster unfolded in 2010. It was a devastating blow to BP and, frankly, the entire oil industry. After many years, it looks like BP has turned a corner in a big way. Is it a better buy than ExxonMobil Corporation (NYSE: XOM), the biggest name in the sector?
What they look like now
BP offers investors a yield of 5.7%. Exxon's yield is roughly 4% -- still notable, but clearly much lower. One of the big differences here is that Exxon's dividend has been increased for 36 consecutive years, while BP's dividend has been increased once after being stuck in neutral for roughly three years.
Go back a little further, however, and BP's dividend record looks even less impressive. After the Horizon disaster, the company suspended the dividend for three quarters. When the dividend returned, it was cut in half. There are very good reasons for this, of course, including the hefty cost of dealing with the disaster. However, it's worth noting that Exxon dealt with its own disaster in 1989 when the Exxon Valdez ran aground in Alaska. That was roughly 30 years ago...meaning that Exxon managed to keep increasing its dividend and deal with the disaster at the same time.
To be fair, there was a scale difference between the two disasters. But Exxon's dividend track record is second to none in its peer group and is clearly better than BP's, even if it doesn't offer the same current yield. That said, there's an interesting nuance here. Exxon's yield is currently toward the high end of its historical range, at levels not seen since the 1990s. In fact, the yield is only a little below where it was when the Valdez disaster was transpiring. BP's dividend yield is roughly half what it was while it was dealing with the Horizon mess.
A little more perspective
Stepping back and looking at this pair from a valuation perspective, Exxon starts to look increasingly interesting. Exxon's price to tangible book value is near its lowest levels since the 1980s. This ratio is, in fact, below where it was when the Exxon Valdez disaster occurred. Over the past decade, Exxon's price to tangible book value has continued to head generally lower and sits today at around 1.8 times.
BP's price to tangible book value is low compared to its long-term history as well but has been improving since 2015. This ratio is now near the high end of its range over the past decade. The absolute figure is 2.1 times. Exxon looks cheap in comparison.
One of the big differences here is that Exxon's production has been falling over the past few years, with declines in 2018, 2017, and 2016. BP's production increased in each of those years. It's not a good sign when production is falling at a company operating in a depletion-based business (once you pull a barrel of oil out of the ground, it can't be pulled out again). No wonder investors have been downbeat on Exxon.
But there was an important directional shift in the middle of 2018 at Exxon. Production was higher between the second and third quarters. And then again between the third and fourth quarters. That came on strength in the company's onshore U.S. production, which is just one of many growth-oriented projects the company has lined up. Investors are likely to reward Exxon's stock if this upturn starts to look more like a trend. In fact, Exxon's shares are up around 18% in early 2019, while BP's shares are up roughly 15.5%. BP is doing fine, but investors may be reconsidering the historically low valuation they've placed on Exxon.
Go with the underdog
There's nothing inherently wrong with BP, but Exxon looks like the better deal, valuation-wise, today. And the issues that have been dragging it down look like they are starting to turn for the better. Yes, its yield is lower, but it has a better dividend track record, and the yield is historically high for Exxon. Exxon looks like the better choice, especially for income investors who view dividend consistency as important.
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