After a devastating 2020, in which demand plummeted as the pandemic escalated, large oil stocks have become a great bet for investors. The Vanguard Energy Index Fund ETF (NYSE 🙂 – whose top 10 holdings are ExxonMobil (NYSE :), Chevron (NYSE 🙂 and Phillips 66 (NYSE 🙂 – is up 29% this year from its 9 expansion. % during the same period.
The latest trend in the oil markets suggests that energy supplies have weathered the worst of the pandemic crisis as oil demand slowly increases, fueled by both OPEC + production cuts and countries reopening after the close of COVID- 19 Revitalizing industrial production and getting cars back on the road.
Even after the recent mighty run, some of the largest oil reserves would still offer some upside if we assume that the global economy is on the verge of multi-year expansion as vaccine roll-out accelerates and the coronavirus is curtailed. With this theme in mind, we turn to the two largest US producers – Exxon and Chevron – to see which “super major” might prove to be a better bet in this environment.
1. ExxonMobil
Among the US oil and gas super majors, Exxon was the least favored oil supply during the pandemic. In early 2020, its shares were slashed en masse as the company had to reverse its ambitious expansion plans after the oil price collapsed at the beginning of the year.
XOM Weekly TTM
At its January announcement, Exxon reported its first annual loss in at least three decades, depreciating $ 19 billion, with cash flows swinging into negative $ 20 billion after dividend payment
That blow had a more devastating impact on Exxon compared to other energy giants. It turned the company's expansionist approach – which was based on massive spending to find more oil and at a time when the world is looking for clean energy sources – on its head.
In addition to the pandemic-induced crash in the oil markets, Exxon of Irving, Texas, announced that it was firing thousands of employees and dropped from its 30-component blue chip in late August after it hit the market. value plummeted.
At the time, investors had serious doubts about the ability to continue to pay dividends. After facing what was clearly the most challenging year in the company's history, CEO Darren Woods devised a plan to gain Wall Street's trust.
Woods' new blueprint for XOM redirects capital expenditures towards favored assets with the highest potential future value, including developments in Guyana and the US Permian Basin, targeted exploration in Brazil and chemical projects to produce high performance performance products. growing.
Investors seem to support this turnaround strategy. The company's stock price, which closed at $ 55.87 Friday, is up more than 60% in the past six months. Exxon pays a quarterly dividend of $ 0.87 per share with an annual return of 6.2%.
In a note last week, Goldman Sachs said Exxon is a better buy based on its long-term renewal story, which depends on the Chemicals Division and its spending containment measures. Goldman has a goal of $ 65 on Exxon. That's 16% more than where the stock closed on Friday.
2. Chevron
Chevron is emerging from the 2020 wreckage in much more than Exxon. What saved the energy giant from San Ramon, California, was tight control over spending and the abolition of major expansion plans over the past five years.
CVX Weekly TTM
That strategy has kept CVX stock well supported over the past five years, as Exxon saw its stock value decline. Still, you can't escape the reality that while Chevron's strategy of keeping spending on a tight line was correct, it also had to borrow heavily to pay its dividends after the collapse in oil prices last year led to tight refining margins. .
] In 2020, Chevron paid more cash in dividends ($ 9.7 billion) than investment ($ 8.9 billion). According to Bloomberg data, that hasn't happened for Chevron in the past 30 years. In addition, last year's acquisition of Noble Energy, a deal closed in October, pushed Chevron's leverage ratio to 23%, its highest year-end level since 2002.
According to Goldman, Chevron's multi-year outperformance compared to Exxon has run its course. The company's analysts, led by Neil Mehta, wrote in a note to customers:
"We remain positive about the balance sheet, dividend sustainability, growth outlook in the Permian and free cash flow from Australian LNG assets."
But they noted that after Chevron's relative outperformance in recent years, the stock is now trading at a premium over peers based on several measures, including enterprise value versus debt-adjusted cash flow, as well as the price in relation to the profit.
After gaining 22%, Chevron's stock traded at $ 102.92, with an annual dividend yield of about 5%. The company pays $ 1.29 per share quarterly
Bottom Line
Until last year, Exxon was a riskier bet in the energy space than Chevron. But the largest US oil giant has now managed to change that perception by rebalancing its portfolio and pursuing major cost savings.
After this turnaround, coupled with improved oil price outlook, Exxon's stock is a better buy, and the company is in a better position than last year to save its quarterly dividend of $ 0.87 per share .
