Exxon Mobil or Chevron: Which is Cheaper?

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In any well-diversified portfolio, a percentage of assets should be invested in energy stocks, and oil companies in particular.  Over the past several decades, oil has produced greater returns than any other sector.  In fact, $10,000 invested in Exxon Mobil (NYSE: XOM) 20 years ago would be worth over $93,000 today, assuming reinvestment of all dividends.  This is almost a 12.5% annualized gain, sustained over a 20-year period!

My two favorite big oil companies for long-term investors are Exxon and Chevron (NYSE: CVX). First I’ll tell you a little bit about each company.  Next, we’ll explore a bit about the companies’ current valuations.  Finally, we’ll look at each company’s track record of creating shareholder value and raising dividends, and then we can determine which has the best prospects for the future.

Exxon Mobil was formed during the 1999 merger of Exxon and Mobil, and is the world’s largest publicly owned oil company.  The company derives 80% or so of its earnings from oil and natural gas exploration and production, with the remainder coming from chemicals and refining/marketing.  Exxon has proved oil and gas reserves of 24.9 billion boe (barrels of oil equivalent). 

Exxon has an ownership interest in 36 refineries, with a combined distillation capacity of 6.22 million barrels per day.  The company’s products are sold at over 25,000 retail stations around the world.  Exxon plans to invest $185 billion in new operations over the next five years, and anticipates that 21 major oil and gas projects will begin production between 2012 and 2014.  The company currently has $12.7 billion in cash reserves compared with only $9.3 billion in long-term debt.

Chevron was also formed by a merger, in this case between Chevron Corp. and Texaco Inc. in 2001.  Chevron is the second largest U.S. oil company and the fifth largest in the world.  Its revenue makeup is similar to Exxon, with slightly more of its income from exploration and production.   Chevron has proven reserves of 11.24boe as of the beginning of this year.  Chevron owns 8 refineries and has an operable capacity of 1.967 million barrels per day.  Chevron has over $20 billion in cash on hand, and $9.7 billion in long-term debt.

The current valuation of these companies is as follows:

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So, on the surface, Exxon looks more expensive, especially given the companies' comparable debt loads, and the fact that Chevron has more cash on hand.  However, a past track record of exceptional performance can certainly command a higher valuation, so let’s see if that is the case here.

Over the past 20 years, Exxon Mobil’s share price has increased, on average, by 9.7% annually, as opposed to just over a 6% annualized increase for Chevron.  Over the past 10 years (Chevron did not pay regular dividends until 2001), Chevron increased its dividend payout by 11% per year, on average, narrowly beating Exxon’s 10.6%. 

So, one can conclude that Exxon has performed significantly better historically.  However, an investor must ask themselves whether or not it justifies such a discrepancy in the valuation of the company.  Bear in mind that both companies are projected to grow at a 10% rate for the next three years by the analysts who cover them.  Additionally, being the higher yielder by almost a full percentage point, Chevron looks like the cheaper and wiser investment at this time.

KWMatt82 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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