(Here's +100 years of data to help you decide)
It's been a week since Chevron kicked off big oil earnings season.
Chevron beat but the stock was off 6%. It has since recovered.
Exxon beat, announced a $10B buyback and the stock crushed.
So some are asking, which one do I own?
In this post I am going to drop some charts that may help you decide.
Let's dive in.
To start out let’s look at which one is more undervalued relative to return on capital employed.
(full disclosure, the ROCE figures I use are different than what the company uses. This is because not all figures to calculate a contemporary ROCE were available in say 1942. I use EBIT = Net Income + Interest Expense + Taxes and Capital Employed = Shareholders’ Equity + Total Debt)
The chart below shows Chevron and predecessor Standard Oil of California ROCE vs. share price divided by the S&P.
Even with the nice performance in the stock since 2020 it still appears undervalued relative to ROCE.
The 12.8% ROCE (right axis) has historically correlated with CVX at 5% of the market versus 2% currently.
With the S&P at $4,477 at the time of this writing that would imply $224 for CVX vs. $134, +67%.
Onto ExxonMobil. The calculation for XOM is a bit different. Since XOM is essentially just 2 companies (SOCONY Vacuum/Mobil Oil and Exxon), I combined the market cap of the two as well as the ROCE components whereas Chevron is a combination of 10+ companies.
Below is the same chart for XOM.
The direct descendant of the Standard Oil Trust just put up a ~14% ROCE in 2021 but the market cap is only 7.7% of the S&P 500 ($345B divided by 4,477 SPX).
This chart would imply XOM should be at 20% of the S&P vs. 5% for CVX.
In this analysis XOM wins.
Do I actually think the stock are worth that much?
No, I am just using this as a guide to see which is more undervalued
Below is Chevron’s reconstructed oil vs. gas production profile. It includes all ~10+ predecessor companies such as Texaco, Gulf, Getty, Noble, Atlas, etc
In 2021 CVX was 41% gas, 59% oil.
Over the long run, gas reserves have been rising while oil has been falling.
But Chevron does have nice production growth in the Permian (targeting +10% in 2022).
Since 2011, Exxon has been the opposite, oil production has been rising faster than gas production as shown below.
And XOM’s gas reserves have been falling. The opposite of CVX.
So it comes down to where do you want the exposure? XOM with a bit more oil mix via Permian growth (+25% guide in 2022) and Guyana or CVX with more International LNG and Permian growth. Drop me a comment which one you like.
Chevron is more upstream, Exxon has more downstream.
This goes back to the origins of the companies. Standard Oil Trust started out as a refiner and transportation company and JD Rockefeller looked down upon the boom and bust cycles of E&Ps.
It wasn’t until the 1890s that he decided integrate his operations by developing the Lima fields in Indiana.
Chevron’s origins were the opposite. Gulf Oil & Texaco were born out of the Texas Oil boom of the early 20th century and Standard Oil of California developed some of the first fields in Cali.
The chart below shows profitability per boe of production.
For the last 2 years, CVX has been winning. They put up ~$14/bbl of profits vs. XOM’s $11.64/bbl in 2021.
Offsetting that is the downstream juice!
I love this chart.
It shows downstream profitability per bbl of throughput adjusted for inflation.
You can see the cyclicality of downstream refining.
In a recession (1983-84, 2000 and 2020) profits go to $0/bbl of throughput.
And peak is $4/bbl. Looks like we are just below mid-cycle for XOM.
I was born in the 80s and came of age in the late 90s and early 2000’s
Back when hip hop was at its best.
Two of the GOATS to do it were Biggie on the East Coast
And Tupac on the West Coast.
RIP
The chart below divides East Coast by West Coast or XOM divided by CVX since the breakup.
It appears XOM is bouncing off long term support.
Have a great weekend and drop me a comment below!
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