Exxon Mobil and Chevron

How super are these supermajors?

Credit: Exxon Mobil

In the context of history, what to think about the present.

There are only a few oil supermajors in the world. These do much more than just oil, but rather are integrated energy companies focused mainly on profiting from the supply of hydrocarbons to the world.

Such companies are all headquartered in the US or Europe. But I don’t trust the European firms or their governments.

One aspect of this is that CEOs often follow the narratives in the media. This often leads their companies to destroy massive amounts of shareholder capital. The recent poster child for this among supermajors has been BP.

The European media today remains a cesspool of devotion to green-energy fantasies sold to the world by lies. The US media is bad enough; Europe is worse.

Another aspect is that there is (or has been) much more opposition to fossil fuels from governments in Europe than in the US. And there are laws in place at present that mandate reductions in fossil-fuel use across the EU. The US government has at times been bad but those in Europe have been much worse.

The two US companies are Exxon Mobile (XOM) and Chevron (CVX). Both do have some “green” investments, and I would not object to anything profitable without subsidies. Ignoring the PR, they both seem to me to have been little impacted by media narratives.

My view is that these firms should keep track of innovations in energy, and there is a long history of that. Back around 1980, Exxon had one scientist involved in magnetic-fusion research, just to keep apprised. I used to see him at conferences.

Let’s look at who they are, their intermediate-term histories and current practice.

The Companies

Exxon and Chevron have much in common. They both work across the entire span of upstream, midstream, and downstream activities involving oil and gas. Here is the pretty image from Exxon about that:

Credit: Exxon Mobil

Both companies carry AA- credit ratings with long-term debt much smaller than Cash from Operations (CfO).

Exxon Mobil

Here is a link to the Exxon Investor Presentation. They are now the largest unconventional (fracking) producer in the U.S., with main assets in the Permian basin. They are also active in deepwater, LNG, conventional, and heavy oil.

Their downstream activities, which they label “Product Solutions,” are fed by their refineries and other processing assets. They include conventional fuels, polymers and other chemicals, lubricants, and much else.

Exxon is targeting $1B of earnings from Low Carbon Solutions by 2030. If they succeed, this will be barely more than 1% of their total.

Exxon states that their number 1 capital allocation priority is “to invest in advantaged, high-return projects.” Their decision to say this explicitly would shock me had I not seen what BP was doing a few years ago.

Overall, Exxon is projecting $30B of cash flow growth by 2030, which is a 55% increase. Nearly a third of that will be from cost efficiencies. This should directly translate into growth of CfO/sh and likely to strong dividend growth.

Chevron

Here is a link to the Chevron Investor Presentation. Chevron has this to say about themselves: “Our objective is to safely deliver higher returns, lower carbon and superior shareholder value in any business environment.”

Chevron highlights their Permian assets where they have pushed down the capex per barrel of energy. And they too are active active around the world and in the Gulf. They emphasize their natural gas resources around the world:

Credit: Chevron

Chevron is more diversified in the US than Exxon, being active in Colorado in the DJ Basin and in the Bakken. They boast that 75% of DJ Basin inventory breaks even below $50 are maintaining 400 Mboe/d just there, which is larger than the production of a lot of oil producers.

In the Bakken, Chevron is seeking to add more assets by buying Hess Petroleum (HES) for $53B. That would be a big addition, but must be compared with their current Enterprise Value near $300B. (At this writing the merger awaits resolution of a conflict with Exxon over assets in Guyana, with a ruling expected later this quarter.)

Chevron highlights some other new projects around the world. In particular, TCO in Kazakhstan seems likely to become a significant contributor.

All that said, Chevron is not up front with any growth target beyond one-year changes in Free Cash Flow. Such a target involves both cash flows and capex, and so is not very informative about what is actually happening.

Returning to the corporate objective, it remains unclear what it might mean to “deliver … lower carbon.” Does “deliver … lower carbon” mean that they are investing heavily in deep carbon sequestration? In their 2024 annual report they define “lower carbon” as follows:

A term describing environments, technologies, business sectors, markets, energy sources and mixes of energy sources, including oil and natural gas, among other things, characterized by or enabling the reduction of carbon emissions or carbon intensities.

Chevron has a VP for “Lower Carbon Energies” and reports spending money on it:

In 2021, the company guided to capital spend of approximately $10 billion through 2028 to advance its lower carbon ambitions, which includes approximately $8 billion for lower carbon investments including in renewable fuels, hydrogen and carbon capture and offsets. Since 2021, the company has spent $7.7 billion in lower carbon investments,

However, the financials include nothing that appears to represent any earnings from their “low-carbon” activities. (One can note that the $10B is roughly 3% of the cash flows across the decade.) They do strongly emphasize their efforts to reduce methane production, a good thing from any perspective.

Both Companies Green PR

So both companies have some activities related to renewables and/or greenhouse-gas reduction, as discussed. These relatively small efforts unsurprisingly receive a disproportionate amount of attention in their presentations. It will be interesting to see if that changes across the next year or two.

Comparing the two companies, it seems to me that Exxon is a bit better focused and they definitely have a crisper presentation of themselves. But as we will see below, this has not translated to huge differences in past performance over time.

Long Run Performance

I rely heavily on YCHARTS and TIKR for financial research. For most companies, one can access at most 25 to 30 years of data. Both of these firms have much longer histories involving many mergers, but a lot of that is not relevant to what will happen after today.

Two key parameters are per-share Cash from Operations (CfO) and the per-share dividend, over the past 25 years. CfO is the most direct measure of cash earned we can easily find. Here they are:

You can see that both companies have steadily grown their dividends (quarterly values shown), with pauses. Over the past 25 years, the CAGR of the dividend for XOM has been 6.2% while that for CVX has been 6.9%.

You can also see that CfO/sh fluctuates wildly. Declines in oil prices can push revenues down enough to drive CfO/sh near or even below zero in the short run.

The past dozen years have seen two major oil price collapses, the first in the mid-2010s due to excess supply, and the second in 2020 due to the pandemic. The result has been that the long-term, 10-year rolling average of CfO/sh has been flat over that period:

Earlier, the CAGR of CfO/sh was near 30% in the years from 2005 to 2010.

Despite the flattening of CfO/sh, as you can see above, the dividends have kept rising. Both firms share a similar approach to managing that:

• About half of CfO goes to capex, essential to maintain production and profits, and when the market cooperates to grow them.

• Dividends and buybacks take more than 25% each, with dividends for Exxon at 30% of CfO and for Chevron at 37%.

• Adding debt, plus asset sales, balances the cash flow.

• The reduced share count due to buybacks enables them to grow the dividend per share while spending the same total amount of money on dividends. I appreciate buybacks used in this way.

When oil prices collapse, reducing buybacks provides the first relief and reducing capex comes second. In addition, neither firm worries about adding debt when times are lean and paying it down when times are flush. With total long-term debt well below CfO, leverage is of no concern at all.

Now consider how the market has valued these companies. Over the past 30 years, the ratio of Price to CfO has mostly been between 6 and 10 save when low oil prices suppressed CfO:

For recent years, about half of CfO goes to capex and all capex (or more) is needed to sustain earnings. So the ratio of price to cash earnings is about twice what we see here, say 18x.

For a discount rate of 10%, it takes a long-term, anticipated, growth rate above 4% to justify the current prices of these stocks. That is not a crazy number.

Exxon boldly guides for more than twice that in the short run. Chevron really doesn’t say anything very clear. Arjun Murti, a successful long-term energy analyst whose substack is worth following, does not see a cycle of major growth as likely.

With that context, let’s look at the dividend yields:

The ballpark number is 4%, with CVX being 90 bps higher than XOM, as has been typical. And a good guess is that forward growth of the dividend will be also near 4%. I own CVX today thanks to the higher yield, despite seeing Exxon as a slightly more impressive company.

If reinvested, such dividends would get you, for flat prices, a 4.8% CAGR over 10 years and 5.9% over 20. If spent, your income would increase by 42% over 10 years and 111% over 20. These numbers would all go up if oil goes through a cycle of high prices.

Remarkably, the yields on these stocks have increased across this century to date. This is the opposite of what bonds were doing through 2021. So these firms seem good ways to diversify earnings.

Looking ahead, if there is an opportunity to get a 5% yield from either one I will jump on it. But of course, the future is unknown. Bad news of various kinds might produce opportunities at even higher yields.

My holdings of CVX are about 5% of my portfolio at present. That seems a good place to be for now.

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