Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) have raised their dividends for 38 and 33 consecutive years, respectively. As a result, they both belong to the group of dividend aristocrats. In fact, as the oil industry is highly cyclical with dramatic boom-and-bust cycles, Exxon and Chevron are the only two oil companies on the dividend aristocrats list.
These two oil majors have many similar features, but it is critical for income investors to examine the differences between the two oil giants in order to select the better of the two dividend aristocrats for their portfolio.
Business Model Analysis
Exxon produces oil and natural gas at a 60/40 ratio while Chevron produces them at a 61/39 ratio. However, Chevron prices a significant portion of its natural gas based on the price of oil. As a result, approximately 75% of Chevron’s production is priced based on the oil price. This means that Chevron is much more sensitive to the oil price than Exxon.
Exxon has a more integrated business model than Chevron, as its downstream (mostly refining) and chemical segments generate a significant portion of its earnings. Chevron generates most of its earnings from its upstream segment. Given the high sensitivity of Chevron to the price of oil, it is only natural that Exxon has proved more resilient than Chevron to downturns in the energy sector. For instance, in the downturn caused by the collapse of the oil price from $100 in mid-2014 to $26 in 2016, Exxon incurred a 75% decrease in its earnings-per-share (EPS). But Chevron saw all its earnings evaporate and posted a loss in 2016.
While Exxon has proved more defensive than Chevron in all the previous downturns, this has not proved to be the case in the ongoing novel coronavirus crisis. The pandemic caused not only suppressed oil prices in 2020, but also depressed refining and chemical margins. As a result, the refining and chemical segments did not provide the support they used to provide to the total results of Exxon and hence the oil major posted its first loss in more than a decade in 2020.
Chevron posted a loss last year as well, but it proved more resilient than it was in previous recessions. The company learned its lesson well from the previous downturn and has drastically improved its asset portfolio since then by investing in low-cost, high-margin barrels. Thanks to the high-grading of its portfolio, Chevron posted record free cash flows in 2018 and 2019 and achieved free cash flows of $5.6 billion in 2020, in one of the most severe downturns in the history of the energy sector. To provide perspective, Exxon posted negative free cash flows of $5.3 billion last year.
Overall, Exxon has traditionally proved more defensive than Chevron in previous downturns. But this advantage has diminished in recent years, primarily due to the shift of Chevron to low-cost, high-margin reserves.
Exxon and Chevron have remarkable differences in their growth records and growth prospects. Chevron grew its production by 5% per year on average in 2017-2019. Even in 2020, when most oil producers curtailed their output, Chevron grew its production 1%. This is in sharp contrast to Exxon, which has failed to grow its production in the last 12 years. Its production has remained essentially flat, around four million barrels per day, since 2008. Even worse, due to the pandemic, its output decreased 5% last year, from 3.95 million to 3.76 million barrels per day.
Until recently, the only consolation for the shareholders of Exxon was its promising outlook. The company expected to grow its production 32%, from 3.8 million barrels per day to five million barrels per day by 2025. However, management recently pulled its guidance and stated that it now expects flat output at 3.7 million barrels per day until 2025. This is a major setback after so many years of stagnation.
Exxon has two major growth drivers, namely its reserves offshore in Guyana and the Permian Basin. Guyana is one of the most exciting projects in the oil industry. Exxon has nearly tripled its reserves in the area, from 3.2 billion barrels in early 2018 to nearly 9 billion barrels now. The company also expects to grow its output in the Permian Basin, from 400,000 barrels per day this year to 700,000 barrels per day in 2025. However, Exxon has indefinitely postponed other growth projects, such as the $30 billion Mozambique LNG export project. Consequently, the natural decline of its oil fields will offset the growth expected from Guyana and Permian.
Chevron has better growth prospects than Exxon. The company has more than doubled the value of its assets in the Permian in the last two years thanks to new discoveries and technological advances. It also expects significant growth from its projects in Australia. As a result, Chevron expects to grow its production by 3% to 4% per year on average in the upcoming years.
Exxon is currently offering a 6.2% dividend yield, which is higher than the 5% dividend yield that Chevron is offering. However, it is important to realize that Exxon is struggling more than Chevron to maintain its dividend. Exxon has a dividend payout ratio of 155%, which is much higher than the 82% payout ratio of Chevron.
In addition, as mentioned above, Chevron generates much higher free cash flows than Exxon. In 2020, Chevron achieved free cash flows of $5.6 billion and thus covered 58% of its annual dividend payments. On the contrary, Exxon posted negative free cash flows of -$5.3 billion. Thus, it incurred a cash flow deficit of -$20.1 billion relative to its dividend.
This helps explain why many analysts are concerned over the safety of Exxon’s dividend. Meanwhile, the safety of Chevron’s dividend has hardly been mentioned. In addition, Exxon’s excessive free-cash-flow deficit is the main reason behind its poor guidance for future growth. The company has drastically limited its growth projects in order to preserve cash and defend its dividend.
Final Thoughts on These Dividend Aristocrats
Thanks to its more integrated business model, Exxon used to be more resilient to downturns than Chevron. However, this advantage of Exxon has diminished in recent years. Exxon is offering a higher dividend yield than Chevron, but it is struggling more than Chevron to maintain its dividend, as evidenced by its inferior payout ratio and cash flow deficit. In addition, in order to defend its dividend, Exxon has curtailed its growth projects. Thus, it has worse growth prospects than Chevron.
As a result, Chevron seems to be the better of these dividend aristocrats for income investors.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.