The pair are among the world’s largest corporations of any sector. XOM and CVX hold huge oil and natural gas reserves and are responsible for the bulk of the planet’s energy production.
The huge scale of these top oil stocks provides cost savings and other advantages many smaller firms could only dream of. They really are the top dogs when it comes to the energy sector. But which one is the top dog? XOM stock or CVX stock?
Each of the two oil stocks offers plenty of pros and cons, but only one will reign supreme. And after this latest earnings report, we kind of get a sense of who is actually the winner. With that in mind, we offer our look at XOM and CVX stock to help you choose which the best bet for your portfolio is.
Exxon and Chevron Both Miss Big
There’s no doubt about it, but XOM and CVX aren’t as mighty as they once were in terms of earnings power. Both Exxon and Chevron have suffered immensely under the weight of falling energy prices. As the glut of crude oil has persisted the duo has seen their profits fall to new lows.
Exxon’s first-quarter profit was its lowest this century. Meanwhile, Chevron recorded back to back quarterly losses. A feat it hasn’t done in at least two decades as an integrated super major.
And this quarter wasn’t any better.
The second quarter was supposed to be a return to more normalized profits for the oil majors — mostly because of oil prices moving higher. Unfortunately, that turned out to be false.
Chevron posted a loss of $1.47 billion, while Exxon saw its profits sink to just $1.7 billion. That was a 59% decline in quarterly profits for Exxon. Analysts had expected that CVX would actually make 84 cents per in profits.
As if that wasn’t enough, the duo saw their revenues fall off a cliff. Even with slightly higher oil prices in the quarter, both XOM and CVX saw big double-digit declines in sales.
So what went wrong at XOM and CVX? In a word — Everything.
Downstream and Upstream Suffered
For both XOM and CVX, their integrated nature didn’t help them one bit. The main reason why investors like the major oil stocks is that they have both refining and production operations — upstream and downstream. That means when oil is high, their production assets make money and drive profits. When oil is low, their refining operations feast on low margins.
Since the oil slump, both XOM and CVX have been able to use their refining operations to carry the load. Last quarter, there was some cracks on that front. But this quarter, refining fell apart.
XOM saw lower refining margins as lousy crack-spreads basically clipped around $850 million in profits from its bottom line. Likewise, CVX saw its refining operations tank. Margins for the refining have been under pressure as a glut of gasoline has built up in the world. According to RBC capital Markets, the amount of gasoline sitting in storage in the United States is about 15% higher than the five-year averages.
Needless to say, that didn’t help XOM or CVX.
Meanwhile, production assets still were hurting. Oil prices have taken a slight turn downward as many smaller firms restarted or completed wells. Supplies of oil actually showed a slight increase over the quarter. When your main business is selling a commodity, a lower price in that commodity means less money. That was reflected in both CVX’s and XOM’s drop in revenues.
For Chevron, the losses resulted in a huge expense charges as several of its E&P assets produced revenues insufficient to cover costs. It basically was pumping out oil at less than what it was worth.
A Look Ahead for Big Oil
Let’s face facts. This was a terrible quarter for both XOM and CVX. Everything seemed to fall off a cliff. Both refining and production simply couldn’t cut it. And with oil still moving downward and now gasoline building up, next quarter isn’t shaping up to be so great for the mighty majors either.
So which one is the better buy?
I’m inclined to lean toward XOM. Exxon had a bad quarter, but it was less bad than CVX. It still managed to make some money overall and it has more exposure to refining than CVX. That should help balance things out a bit more.
Exxon’s other win comes from its larger exposure to natural gas. Natural gas prices have been rising and the fuel continues to be the top choice for power producers worldwide. Its recent moves, such as buying InterOil Corporation (USA) (NYSE:IOC), will give it even more exposure to key LNG markets in Asia.
Perhaps more importantly, XOM has more levers to pull when it comes to its lucrative dividend.
And while CVX did keep its payout the same, the losses at its production arm continue to grow and its cash flows already aren’t covering much of its capex spending. That’s not exactly a great thing for that lucrative dividend. A couple more quarters like this and CVX could have to do the unthinkable. And that is possible considering that oil is tanking again and that CVX is more leveraged to oil production than natural gas.
The latest quarter for both XOM and CVX was bad. Quite frankly, neither of them might be a buy at this point, but it was less bad for Exxon. That should help give it the edge over the rest of the year, if the energy environment stays the same or worsens slightly.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.