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Why Exxon is Less Exposed to Crude Downturn Than Chevron

Because the energy sector has been a major contributor to the S&P 500 index's earnings growth over the past few quarters, it is natural for investors to consider the sector when it comes to diversifying a portfolio.

Exxon Mobil CorporationXOM - the largest publicly traded energy player - and Chevron CorporationCVX are the prominent two names belonging to the energy sector. With their massive market capitalization of $317.3 billion and $219.2 billion, respectively, these companies dominate and define the Zacks Oil & Gas-International Integrated industry , which is included in the energy sector.

We have employed a few parameters for an in-depth analysis of Exxon Mobil and Chevron. Let's analyze the factors.

Price Performance

Over the past three years, Chevron has gained 7.3%, outperforming both Exxon Mobil and the industry. During the aforesaid period, Exxon Mobil plunged 12.5%, while the industry declined 3.4%.

Simply looking at the pricing chart, Chevron performed significantly better despite the market witnessing a crude downturn since mid-2014.

Dividend Yield

Both Chevron and Exxon surpass the S&P 500 when it comes to dividend yield. Presently, Chevron has a dividend yield of 3.9%, slightly below Exxon Mobil's 4.1% and way ahead of S&P 500's 1.9%.

Our data base shows that since 1997, Exxon Mobil's dividend yield never reached the current mark of 4.1%. Over the past 35 years, the energy supermajor has rewarded shareholders with an annual average of 6.3%.

Our data base shows that since 1997, Exxon Mobil's dividend yield never reached the current mark of 4.1%. Over the past 35 years, the energy supermajor has rewarded shareholders with an annual average dividend hike of 6.3%.

On Jan 31, 2018, Chevron got approval from its board of directors to hike its quarterly dividend to $1.12 per share from the prior payment of $1.08. With this, the company paved the way to increase the yearly dividend for 31 years in a row.

Free Cashflow

For the first time in four years, Chevron managed to report positive free cashflow for 2017. Last year, the company generated $20.5 billion in operating cashflow, which was sufficient to cover up capital spending of $13.4 billion, resulting in free cashflow of $7.1 billion.

Although the oil slump hurt Exxon Mobil's upstream businesses, it did not significantly affect the firm's free cashflow. Even during the crude downturn, the company has been reporting positive free cashflow. Last year, Exxon Mobil's free cashflow surged 147.7% to $14.7 billion.

Balance Sheet Strength

Considering the debt to capitalization ratio, both Chevron and Exxon Mobil have sound balance sheets. Exxon Mobil has little exposure to debt as reflected by the ratio of 11.15%, higher than Chevron's 21.15%.

The exposure to debt of both the stocks is lower than the industry, with debt to capitalization ratio of 28.27%.

Business Focus

Although Exxon Mobil has strong focus on all the business segments like upstream, downstream and chemical, the majority of its earnings come from the upstream business spread across the globe, with majority volumes from Asia and the United States. Excluding the impact of U.S. tax reform and impairments, the company generated $7.7 billion during 2017 - representing 50.6% of the total profit - from upstream activities.

Exxon Mobil also has extensive downstream and chemical operations. These businesses consistently gave strong support to the company when the market witnessed a weak crude pricing scenario, especially in 2016. In 2017, it generated $4.9 billion from downstream business and $4.2 billion from chemical activities.

From the upstream operations, Chevron generated $8.2 billion in earnings through 2017 against a loss of $2.5 billion in 2016. Although the company has exposure to downstream operations, the weakness in the upstream business lead Chevron to incur a loss of $497 million during 2016.

Reserves

The snapshot of Chevron's reserve replacement ratio is quite impressive. For the past five years, the company's average reserve replacement ratio was reported at 107%. For companies with less than 100% reserve replacement ratio, there will be a significant risk of running out of crude and natural gas in the coming years.

During 2017, Exxon Mobil managed to replace 183% of oil and gas production by adding 2.7 billion oil-equivalent barrels to prove reserves.

Bottom Line

Both Exxon Mobil and Chevron are dividend investor-friendly stocks. The companies also have strong balance sheets, reflecting further rooms for future dividend hikes.

The crude downturn - especially during 2016 - affected both the players' upstream businesses. However, unlike Chevron, Exxon Mobil managed to report profit and positive free cashflow during the aforesaid period, thanks to stronger downstream presence.

Both the stocks carry a Zacks Rank #3 (Hold).You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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