Chevron Dethrones Exxon As America’s Most Valuable Oil Company

The U.S. oil sector witnessed a historic day yesterday, as ExxonMobil fell behind its breakaway sister Chevron CVX +2% in market capitalization with $141.6 billion versus $142 billion at NYSE closing, making it America’s most valuable oil company. This is the first time since the breakup of Rockefeller’s Standard Oil in 1911 that Chevron surpassed Exxon in market cap. The reshuffling comes at an unprecedented time for the global oil market, which has been battered by economic lockdowns and an oil price war in the wake of the coronavirus pandemic. But the real story here is not so much one of Chevron’s rise, but rather Exxon’s decline.

Since the start of 2020, Exxon’s value is down a whopping 50% compared to Chevron’s 39%. Meanwhile, the S&P is up 5% on the year. The losses forced Exxon’s unceremonious exit from the Dow Jones Industrial average in August and called into question the company’s ability to pay out its prized dividend to shareholders.

Quite the fall from grace for a company that just seven years ago was the world’s most valuable, totaling nearly half a trillion dollars.

In terms of production volume and reserve size last year, Chevron never “leapfrogged” Exxon. The oil giant recorded 2.4 million barrels per day (bpd) of net liquids production worldwide, while Chevron produced 1.8 million bpd in the same category. Reserve-wise, Exxon also closed the year ahead with 14.6 billion barrels of net proved reserves, while Chevron’s net proved reserve capacity stood at 11.4 billion barrels.

Some of the highlights of Exxon’s 2019 metrics include 79% growth in the U.S. Permian Basin production; five additional offshore discoveries in Guyana; and an enhanced deep-water portfolio in Brazil, boosting its deep-water acreage positions in 27 countries.

Despite these moves, XOM’s stock price and valuation is on the decline.

While Exxon’s high profile upstream operations and global investments may be regarded as promising and prestigious by conventional standards, investors signaled caution over the giant’s extensive spending and debt-to-equity ratio in 2019. In March 2019, the XOM stock fell more than 1% when CEO Darren Woods announced a plan to increase capital spending by 10% per year, up to $35 billion, for the next several years.

Debt has also been a mounting source of pressure. In its 2019 end-of-year balance sheet, the company recorded $46.9 billion debt, with a debt-to-capital ratio reaching 19.1%. The same year, Chevron’s debt-to-capital ratio was 15.8%. By the end of 2019, another hit for Exxon came from Moody’s MCO +1.4% as the credit agency downgraded the oil giant’s credit outlook due to its negative free cash flow forecasts.

These negative indicators for Exxon’s financial situation hardened unexpectedly as Covid-19 torpedoed demand for global commodity markets. In May, Exxon announced global shut-ins of up to 400,000 barrels per day (bpd) for the second quarter, bringing a halt to 75% of its Permian drilling rigs.

Chevron experienced a similar fate in the Permian this year. The company announced in May that it intends to cut shale oil and gas output by 20% before 2021. Despite shared challenges in the Permian shale game, Chevron proved more resilient in its upstream assets with smarter investments and more restrained spending.

Analysts argue that the upstream market has evolved to reward cost-conscious companies. Long gone are the halcyon days of $100 oil when all that mattered was production and reserve size. WoodMackenzie Exploration Vice President Dr. Andrew Latham points out that following the oil price crash of 2015-16 and the price plunge earlier this year, upstream players in deep-water began to “tighten their focus on costs.”

In support of this trend, WoodMac’s resilience studies show that “ExxonMobil’s XOM +5.3% cash margins are at the low end of the Majors’ range at US$30/bbl, despite a growing weighting of deep-water assets. The problem is its exposure to high-cost, low-margin assets.” The same study highlights Chevron and Shell as managing the “most resilient upstream portfolios at US$30/bbl, [which] offer the highest cash margins at US$70/bbl and can deliver the biggest margin expansion.” The study adds that both portfolios have a big weighting to deep-water projects and cash-generative LNG.

Yesterday’s news of Chevron toppling Exxon in market capitalization tells several stories. The first is the precipitous fall of oil over the past seven years due to overproduction and slowing demand growth, capped by the devastating coronavirus. The second is the relative resilience of Chevron, whose cost-conscious decisions have insulated it somewhat from market trends. Lastly, Exxon is over-leveraged and over- spending on low-margin assets. The confluence of these narratives explains why Chevron is now top dog in the U.S. oil business.

The Chevron valuation also proves that conventional wisdom — prioritizing production capacity and aggressive investment appetite above all else — is outdated. While I predict that oil prices will indeed bounce back as Coronavirus comes under control – perhaps as early spring 2021 – we are witnessing tectonic shifts in the oil market landscape. Only the nimble will survive.
Source: Forbes