Chevron and Exxon Share Faith in Oil But Pray Differently

(Bloomberg Opinion) -- Carbon capture and fuel-spewing algae are interesting, but if Big Oil is going to handle this whole energy-transition thing, the first thing it needs are some new charts.

Giving their annual analyst presentations this week, both Chevron Corp. and Exxon Mobil Corp. kicked things off, more or less, with what can be called the up-and-to-the-right chart. This is a familiar one showing how global oil demand will keep going up for at least a decade or so, and the natural decline of existing fields means there is a huge investment requirement to prevent the pumps running dry. In other words: Hey money managers, read all the Larry Fink letters you like, but you need us.

Guys, no. Just stop. Look at where the sector trades. Only last week, I noted how energy's weighting in the S&P 500 had slipped below utilities for the first time ever. As Exxon made its pitch Thursday morning, and oil prices ignored OPEC's shock-and-awful supply cut, I wondered if energy could be smaller than real estate by the end of the month.

Here's the thing about the chart: Chevron  and Exxon may well be right that, for one reason or another, oil demand keeps rising through the 2030s. But given the threat of climate change, the growing political and investor focus on it, and the falling cost of rival, zero-carbon energy sources, who now really believes the next decade or two in energy can be defined by a straight(ish) line?

Exxon CEO Darren Woods acknowledged the current turmoil, but added “the longer term horizon is clear,” and it's hard to think of a less-appropriate characterization of the energy business — any bit of it, from fracking to Teslas — in this moment.

It's telling that Exxon's case for continued growth in consumption of fossil fuels rests on their “affordability,” especially in the developing world. That's an interesting word, because the whole point of climate change is that we cannot “afford” its potentially catastrophic outcomes (which are expected to hit developing economies harder). If these fuels were “affordable” — in the full, proper sense — then we wouldn't even be talking about climate change.

Ryan Lance, CEO of ConocoPhillips, took a better approach in November when he kicked off with two charts focused on the sector's denuded relationship with investors and the inherent unpredictability of the market. The gist of that presentation was building an oil and gas company that could weather the storm and bring skeptical investors back.

On that basis, those charts aside, Chevron has opened up a clear gap on its strategic positioning versus its rival.

It comes down to cash flow and timing. Even as Chevron foresees robust oil demand continuing over the long term, it was careful on Tuesday to leaven that with a heavy dose of near-term rewards for investors, in the form of $75-$80 billion of payouts planned through 2025, equivalent to more than 40% of the current market cap. Assuming $5 billion of annual buybacks and a constant dividend yield of 5.4%, the low end of that guidance implies annual dividend growth of 5%, a payout yield of about 8% and an annual total shareholder return of about 12%. Finance chief Pierre Breber made sure to hammer it home from the stage: “To the generalist portfolio managers out there, if you're looking for cash, Chevron is the place to be.”

Exxon, meanwhile, is deep into a counter-cyclical capex boom. And while it eased back on the throttle a tad, it still plans to spend $30-$35 billion a year through 2025. Using Exxon's guidance of average yearly growth in cash from operations of 10% and the midpoint of the capex range implies Exxon wouldn't cover its dividend from free cash flow until 2025, even with minimal growth in payouts. Under this scenario, Exxon remains dependent on asset sales or borrowing to bridge the gap. And there appears to be no room for buybacks, once the company's calling card. As a value proposition, it hews toward multiple expansion rather than cash support.

This is why, even as Exxon touted its technological heft and growing earnings capacity on Thursday morning, its dividend yield edged closer to a once-unthinkable 7%. It's also why the recent flip in relative valuation with Chevron looks set to stay for the foreseeable future.

With the Brent crude oil futures curve sub-$58 as far as the eye can see, the $60 price underlying the medium-term scenarios of both companies has raised some eyebrows (although Chevron's is, notably, nominal). What is clear, though, is that Chevron and Exxon are in very different places right now.

Time horizons among energy investors have shortened (see this). Chevron's balance of spending and cash returns is more attuned to this mindset, which isn't counter-cyclical so much as anti-cyclical.

Exxon, meanwhile, is effectively rebuilding itself; capex guidance through 2025 adds up to roughly three-quarters of its enormous fixed asset base. As Woods said himself in response to a question, when this financial strategy balances is “a function of prices.” Both companies may remain faithful to that straight-line future. The crucial difference is that, from the perspective of today's investor, Exxon's approach depends on it.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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