To some, investing in either ExxonMobil or Chevron is making pretty much the same bet. Don't tell our analysts that, though. To them, saying these two companies are the same is like saying you can root for the Red Sox and the Yankees at the same time.
So we brought together two of our energy analysts who take opposite sides of the ExxonMobil/Chevron debate and recorded the shouting match that ensued. After some severe editing and censoring, here is what each had to say.
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Matt DiLallo:For me, Chevron is the easy choice over Exxon. It has the complete trifecta in my book: a better valuation, a more compelling dividend yield, and a bit more growth. Exxon doesn't even come close across all three metrics that matter to me.
Chevron's valuation is hands down cheaper than Exxon's. The following chart shows the company sells for a meaningful discount to Exxon's price-to-earnings ratio, enterprise value-to-EBITDA ratio, and price-to-tangible book value.
Because its valuation is cheaper Chevron also offers a fatter dividend yield: Investors could recently buy the stock with a 4% yield, which is 25% higher than Exxon's 3% yield. The other reason for Chevon's higher yield is that it has grown its payout at a higher rate than Exxon's over the past few decades, as shown in the next chart.
Looking ahead, Chevron should be able to sustain its faster dividend growth because the company is expected to grow production faster than Exxon. From 2013 to 2017, Chevron expects to grow its total net production by 20%, from 2.6 million barrels of oil equivalent per day, or BOE/d, to 3.1 million BOE/d. Meanwhile, Exxon expects less robust production growth of about 14%, from 4.2 million BOE/d to 4.8 million BOE/d. While Exxon is growing off of a larger base, as its beginning output was 1.6 million BOE/d more than Chevron's, that actually makes it even more impressive that Chevron is growing its production by 500,000 BOE/d while Exxon is only expected deliver 600,000 BOE/d of growth.
Bottom line here is that Chevron is cheaper, has a better dividend yield, and is growing faster. Add it all up and Chevron is the better buy in my book.
Tyler Crowe: OK, so based on those things Matt mentioned, Chevron looks a little more appealing. Before we all jump to conclusions about buying Chevron, though, let's consider a few things about ExxonMobil.
1) It's a better capital allocator: So Chevron beats ExxonMobil by a few points on valuation -- so what? That isn't just happenstance or the market acting irrationally. ExxonMobil has a slightly higher valuation because it is much better than Chevron at generating returns by just about every conceivable measure.
If you were to ask whether I would be willing to pay one more point on a P/E ratio for a company that generates a return on equity close to 6 percentage points higher, I'd say sign me up.
2) Dividends aren't the whole story: While Chevron has done a commendable job of raising its dividend -- although it has needed to either sell assets or issue debt to cover those dividend payments, while ExxonMobil has paid dividends using organic free cash flow -- let's look at the other component of generating shareholder return: share buybacks. On top of keeping pace with Chevron's dividend increases over the past 10 years, ExxonMobil has also reduced its total share count by over one-third while Chevron has only cut its total shares outstanding by a shade over 10%.
3) Growth comes from more than just production: Yes, the production of oil and gas is the earnings powerhouse for pretty much every integrated oil and gas company, but they are called integrated for a reason: they deal with every part of the value chain of these commodities. Over the next several years, ExxonMobil is looking to balance its portfolio of assets by investing more heavily in its refining and chemical manufacturing facilities. One of those projects is the Baytown ethylene plant that will cost upward of $6 billion and should be up and running in 2017. Add this to the massive chemical and lubricant plant expansions in Saudi Arabia and Singapore, and you have a company preparing to take advantage of every part of the oil and gas business to generate profits.
So when making your decision between investing in Chevron or ExxonMobil, keep those things in mind. With better returns, a superior return of cash to shareholders through stock buybacks and dividends (all paid for with organic free cash flow), and a more balanced portfolio that won't be as susceptible to oil price swings, I think ExxonMobil is the clear winner here.
The article Better Buy Now: ExxonMobil Corporation vs. Chevron Corp. originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. Tyler Crowe has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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