Ahead of Earnings, Is Exxon or Chevron a Better Value?

West Texas Intermediate (WTI) crude oil set a new 52-week low on Thursday at $48.21, nearly 50% below its high of $94.88 in the same period. That means that the billions of barrels of oil and natural gas that oil companies own are worth about 50% less than they were a year ago.

As bad as oil prices have been, natural gas prices have not fared much better. Natural gas closed at $2.82 per million BTUs on Thursday, more than a dollar per million BTUs below the year ago price of $3.93.

These adjustments to the two companies’ asset values are, however, just one element in the total picture. Because shareholders often care most about dividends, Chevron’s 4.6% dividend yield looks a lot better than Exxon’s 3.6% yield. The issue, of course, is how long the two companies can maintain those yields with oil price below $50 a barrel and natural gas below $3 per thousand cubic feet.

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On the basis of their forward price-to-earnings (P/E) ratios, the two companies are roughly equal, with a ratio of 15.47 for Chevron and 15.28 for Exxon. Historically, forward P/E for these two companies falls in a range of 11 to 12. Comparing price-to-book ratios for both, Exxon’s P/B is 1.98, compared with Chevron’s 1.12.

When it comes to those dividend payments, cash on hand is good metric to consider. Exxon reported about $5.2 billion cash at the end of the first quarter, while Chevron reported $13.1 billion. Exxon’s annual dividend of $2.92 is paid on about 4.2 billion shares outstanding and totals about $12.3 billion a year. With operating cash flow of $38 billion over the past 12 months, Exxon faces no significant danger of reducing or eliminating its dividend.

Chevron’s annual dividend is currently $4.28 and the company has about 1.88 billion shares outstanding. That works out to about $8.05 billion in annual dividend payments. Chevron’s operating cash flow was $25.38 billion, so its dividend is not in much danger either.

Share price gains are less encouraging. At Exxon, the consensus price target on the stock is $92.35. At Thursday’s closing price of $81.14, the potential upside on the stock is 13.8%.

Chevron stock closed at $92.94 on Thursday, and the consensus price target is $110.17, which pencils out to an implied gain of about 18.5%.

On the basis of dividend yield alone, Chevron looks like a better choice. And at a P/B ratio of 1.12, the stock also appears to be a better value.

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The catch is which direction the price of oil decides to take. Both stocks are more likely candidates for buy-and-hold investors, but again, the price of oil will determine share price growth.

Both Exxon and Chevron are set to report second-quarter results on Friday, July 31. Exxon is expected to post earnings per share of $1.06 on revenues of $72.48 billion, compared with per-share earnings of $2.05 and revenues of $111.65 billion in the second quarter of 2015.

Chevron is tagged to post earnings per share of $1.08 on revenues of $30.91 billion, compared with per-share earnings of $2.98 and revenues of $57.94 billion in the year-ago quarter.