Famed investor Warren Buffett (Trades, Portfolio) of Berkshire Hathaway and investment house Goldman Sachs are among those singing the praises of Exxon Mobil (XOM, Financial) recently. My question is: where is the love for Chevron (CVX, Financial)? While I like both stocks here, Chevron beats Exxon on almost every important metric and represents a superior alternative.
Chevron has significantly outperformed Exxon over the past 5 years. Today, I believe Chevron offers a much better value to investors when compared with Exxon and is likely to continue its outperformance going forward.
Goldman Sachs analyst Arjun Murti and his team had this to say in their upgrade on shares of Exxon Mobil:
On long-term metrics, Exxon shares look inexpensive versus its own history on an absolute basis and relative to the S&P 500. Exxon is trading at a discount to its long-run average (1995-2013) on an absolute basis and relative to the S&P 500.
In the head-to-head comparison, Chevron has a lower PE ratio both on a current and 2014 estimated EPS basis, a significantly higher yield, and significantly higher net margins. Exxon wins only on the long-term debt to capital and ROE metrics. Both stocks are highly ranked on the quality and safety ladders. However, despite all the media focus on Exxon lately, notice S&P has a higher ranking (Strong Buy, 5 stars) on Chevron and a significantly higher 12-month price target (up 18%) as well.
Production
Chevron sees new developments in LNG in Angola, Gorgon & Wheatstone in Australia, Asia Pacific and the Gulf of Mexico fueling production growth of 1% per year during 2012-2014, 4%-5% per year between 2014-2017. The company is predicting 25% total growth through 2017, to 3.3 million boe/d. Development at the Jack (50% stake)/St. Malo (51%), Big Foot and Tubular Bells projects in the deepwater Gulf of Mexico will begin production in 2014-2015.
XOM expects volume growth of 2%-3% per annum in 2013-2017, with net additions of 1 million boe/d, 90% liquids, by 2017. Between 2012-2017, XOM expects to start up 31 major projects. XOM sees 2013 production down 1% from 4.2 million boe/d in 2012 as it reduces natural gas volumes by another 5%. Liquids production is seen up 2% in 2013. XOM is ramping operations in the Bakken and Permian Basin. The Kearl oil sands facility started up in April. Exploration drilling in the Arctic's Kara Sea is expected to start in 2014.
US Natural Gas
The recent weather related jump in domestic natural gas prices has surely been a welcome and very positive event for XOM. Exxon is the #1 producer of natural gas in the US and produced an average of 3,585 MMCf/day over the first 6 months of 2013. Yet Chevron is also a top-10 domestic producer of natural gas with roughly 1/3 the output of Exxon. Both companies will benefit from the recent pop in natural gas prices, although Exxon more so.
Gorgon Cost Escalation
Perhaps one reason Chevron has seen some stagnation is its price appreciation recently is the cost increases at the massive Gorgon LNG project. Gorgon will produce the equivalent of 450,000 boe/day (47.3% of which goes to operator Chevron) when it comes online in 2014. However, it should be pointed out that both Exxon and Royal Dutch Shell (RDS.A) (RDS.B) each hold a 25% stake in Gorgon. While operator and largest stakeholder Chevron has taken the brunt of the cost increases on the chin, the pain has been spread around among other stakeholders, including XOM.
Ecuador Litigation
Perhaps another reason CHEVRON has been underperforming lately is the media attention paid to the ongoing Ecuador related litigation. However, considering recent testimony in a US court showed how corrupt and tainted the case against Chevron appears to be, investors have more or less shrugged off concerns over the $9.5 billion ruling by the Ecuadorian court. I mean how seriously can investors take a $19 billion verdict that was subsequently reduced by half in what appears to have been a last minute attempt by the Ecuador court to get something (anything!) out of Chevron. It's like: "Oops! We were only off by $9.5 billion - sorry!"
Summary and Conclusion
Despite all the recent media attention given to Exxon Mobil, Chevron represents a much better value in terms of valuation; yield and 12-month price appreciation potential based on 2014 earnings estimates. I continue to believe that Chevron is the best integrated oil company on the planet. The company is cheap compared to both Exxon and to the S&P 500. Chevron is a STRONG BUY.
