Both Chevron and Exxon Are Reporting Their Earnings On Friday; Here’s Why Investors Favor Chevron Over Exxon
Oil stocks are getting hammered amid the coronavirus pandemic. The ongoing oil crisis is proving to be nothing short of catastrophic. This has left investors wondering whether the strongest ones in the industry will come out from this crisis in one piece. This year, we already had Chesapeake Energy (CHKAQ Stock Report) and Extraction Oil & Gas (XOGAQ Stock Report) filing for bankruptcy. Dozens more may follow suit should the oil price fail to recover.
Thankfully, Chevron Corporation (CVX Stock Report) and ExxonMobil (XOM Stock Report) are the two major oil companies which are some of the most financially sound. Although both companies have a strong footing to weather the weak energy demand from the pandemic, there are reasons for investors to favor Chevron over ExxonMobil.
These Energy Titans Are Built To Handle Adversities
The choppiness in the oil industry is unlikely to affect both Chevron and Exxon since both can rely on their respective pristine balance sheets. Both energy giants had the lowest gearing ratios of any major integrated energy companies that they are up against. Chevron’s financial debt to equity ratio of 0.18 times, with Exxon touching lower at 0.14 times. Many would consider such levels low in any industry.
That said, Exxon has already started to tap the debt market earlier this year, issuing around $18 billion in bonds. In just a short span of a few months, the company has reportedly increased its long-term bonds by 70%. That’s a significant increase in debt levels. Hence, it will materially change the company’s leverage profile. This will allow Exxon to fund dividend payments at least for the next few quarters.
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Robust Deepwater Projects & LNG Makes Chevron The Better Investment
With so much uncertainty lingering around the oil & gas industry, many fears that the downturn might last for years. Therefore, the ability of a company to withstand such a ‘marathon’ is an important consideration. Of course, this likely won’t be an issue in the case of either Chevron or Exxon. Don’t get me wrong, both are equally solid dividend stocks to buy. But in the unfortunate event where this crisis lasts much longer than expected, we may have to pick only one. And Chevron will still be the favorite among investors.
Wood Mackenzie, global energy, renewables, and mining research and consultancy group, has reported that Chevron Corp and Royal Dutch Shell (RDS.A Stock Report) are the most resilient, thanks to their robust deepwater projects and LNG as well as less exposure to high-cost assets. On the other hand, Exxon is particularly more vulnerable due to its high exposure to low-margin assets. As a result, Exxon might stack up poorly against its largest peers. But it is still in a much better position than its industry peers with much less cash.
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Bottom Line
It is highly likely that both Exxon and Chevron would weather the energy downturn just fine. It isn’t going to be easy and it may take a while before the oil & gas industry can recover to pre-COVID levels. But the two companies had been on different paths even before the crisis. Chevron had been aggressive on capital expenditure a few years ago and is now benefiting from it. Meanwhile, Exxon was increasing its Capex more aggressively. It is clear to many investors that Chevron is the easy win here. Now, there’s nothing fundamentally wrong with Exxon or what it has been doing. It’s just that the risks are elevated. The higher exposure to low-margin assets and the higher debt-to-equity ratio appears to make Exxon less desirable than Chevron
