Despite a slight bump in their stock prices on Friday, oil majors ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) are down over the last year compared to a whopping 34.3% gain in the S&P 500. Part of the reason for the slumping stock prices is the reduced demand for oil from a struggling China.
China is implementing a wave of measures -- including lower interest rates, lower reserve requirements for banks, incentives to boost stock buybacks, and stimulus for its struggling real estate market. Given China's exposure to energy-intensive industries like manufacturing, one would think that stimulus would be a boon for global oil demand and energy stocks. However, the market may be more focused on supply for now.
Here's what's weighing down the energy sector and why ExxonMobil and Chevron could be two dividend stocks worth buying now.
Supply dynamics
According to the U.S. Energy Information Administration, the Organization of Petroleum Exporting Countries (OPEC) and OPEC+ countries combined for 59% of global oil production in 2022. So, when OPEC+ makes a policy change, the market listens.
Many OPEC+ countries can produce oil and gas at low cost due to geological advantages and easily accessible reserves that can be extracted without resource-intensive fracking -- which requires a lot of water, sand, and other materials. Many OPEC+ producers operate as national oil companies instead of independents, making it easier to regulate production. The idea is to avoid flooding the market with supply and tank oil prices.
OPEC+ is considering increasing production, which would boost global supply and pressure oil prices. In response to the risk of higher production, West Texas Intermediate (WTI) crude oil prices (the U.S. benchmark) have dipped into the high $60-per-barrel range while Brent crude oil prices (the international benchmark) are hovering above $70 per barrel. These are the lowest prices so far this year.
Lower oil prices would be a particularly bad look for companies that took on debt to accelerate production growth or those that made a splashy acquisition. For example, Occidental Petroleum and Devon Energy are two exploration and production (E&P) companies that made multibillion-dollar deals. The lower oil prices tumble, the worse these deals will look in hindsight.
Dividends you can count on no matter the market cycle
ExxonMobil and Chevron have both engaged in blockbuster deals of their own. ExxonMobil completed its acquisition of Pioneer Natural Resources in May. And although Chevron's acquisition of Hess has faced challenges, it could be nearing a turning point as the U.S. Federal Trade Commission could be close to approving the deal.
Both companies are well-positioned to handle lower oil prices because of their financial discipline over the last few years. They improved their balance sheets by lowering their leverage. They also have geographically diverse upstream portfolios, sizable refining businesses, low-carbon fuels segments, and more. Integrated business models make these majors less vulnerable to swings in oil and gas prices compared to an E&P focused solely on the upstream side of the industry.
ExxonMobil and Chevron also pay stable and growing dividends, with ExxonMobil touting 42 consecutive years of dividend increases compared to 37 years in a row for Chevron. ExxonMobil's stock currently yields 3.3% while Chevron yields 4.5%.
Both companies also have fairly reasonable payout ratios. ExxonMobil's sits at 45.7% compared to 62.2% for Chevron -- indicating both companies have a good amount of earnings left over after accounting for dividends. However, payout ratios have to be taken with a grain of salt in the oil patch, as earnings can vary wildly based on oil and gas prices. The key is to maintain a strong balance sheet to have ample liquidity when there's a downturn and rake in profits during periods of expansion. Here's a look at earnings and dividend payments over the last five years -- including the pandemic-induced crash in 2020.
Metric | 2019 | 2020 | 2021 | 2022 | 2023 | 5-Year Total |
|---|---|---|---|---|---|---|
ExxonMobil net income | $14.34 billion | ($22.44 billion) | $23.04 billion | $55.74 billion | $36.01 billion | $106.69 billion |
ExxonMobil dividend payments | $14.65 billion | $14.87 billion | $14.92 billion | $14.94 billion | $14.94 billion | $74.32 billion |
Chevron net income | $2.92 billion | ($5.54 billion) | $15.63 billion | $35.47 billion | $21.37 billion | $69.85 billion |
Chevron dividend payments | $8.96 billion | $9.65 billion | $10.18 billion | $10.97 billion | $11.34 billion | $51.1 billion |
Data source: YCharts.
Despite paying out more dividends than they earned in profits in 2019 and reporting losses in 2020, both companies still have five-year average payout ratios under 75%.
Two passive income powerhouses that are worth buying now
ExxonMobil and Chevron are two well-rounded dividend stocks to buy even in a mediocre oil price environment because they have diversified business models and strong balance sheets that can support growing dividends even if profits are falling. Both companies sport price-to-earnings (P/E) ratios under 15 -- which look dirt cheap at first glance. But these valuations could look much more expensive if oil and gas prices keep tumbling and profits come down.
The best approach to ExxonMobil and Chevron isn't to look too much at their P/E ratios and trailing figures but rather at how each company is positioned to handle lower oil prices. ExxonMobil's corporate plan through 2027 is based on a Brent crude oil price of $60, whereas $70 oil is Chevron's upside scenario because the company is built for much lower oil prices.
All told, both oil majors are great buys for investors looking to generate passive income from energy stocks even if oil prices continue to fall.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Why Top Oil Stocks Like ExxonMobil and Chevron Continue to Fall Despite China's Stimulus and Interest Rate Cuts was originally published by The Motley Fool