Key Points
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Exxon and Chevron have been trading near all-time highs thanks to high oil prices.
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Oil prices have a long history of volatility, and a decline is highly likely at some point.
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Exxon and Chevron are built from the ground up to survive the energy industry’s inherent volatility.
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ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) are two of the world’s largest energy companies. Their share prices are high today because energy prices are high today. If history is any guide, neither of those situations will last forever. But the really important thing to understand about these two companies is that they are built to survive the entire energy cycle while still rewarding investors with dividends. Here’s what you need to know.
Energy prices will eventually fall and take Exxon and Chevron with them
Exxon and Chevron are what are known as integrated energy companies. That means that they have operations across the entire energy sector, from the upstream (drilling) through the midstream (pipelines) and to the downstream (chemicals and refining). That diversification is meant to help soften the impact of commodity price swings.
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That said, these two energy giants remain heavily dependent on commodity prices for their revenues and earnings. When oil prices are high, they do well; when they’re low, they don’t do as well and can even lose money. Energy is a commodity with a long history of volatility, rising and falling in response to supply and demand, natural and man-made disasters, and geopolitical conflicts, among other things. Right now, oil prices are high due to the ongoing conflict in the Middle East.
History is very clear: at some point the conflict will likely end, and oil prices will decline. When that happens, Exxon and Chevron’s stock prices will fall. In fact, if you are patient, the best time to buy one of these companies isn’t when energy prices are high, but when they are low. Of course, that requires stepping in to buy when others are selling, which can be difficult.
Exxon and Chevron are built to survive
The thing is, Exxon and Chevron are well aware of the energy cycle and prepared to deal with it. For example, they have debt-to-equity ratios of 0.13x and 0.17x, respectively. They have the lowest leverage in their peer group. This enables the two companies to take on debt during energy downturns, allowing them to continue funding their businesses and supporting their dividends.
Dividends are a key feature here, with Exxon having increased its dividend annually for 43 consecutive years. Chevron isn’t far behind at 38 years. That’s the proof that their diversified business models, built atop rock-solid balance sheets, work. And it is also why these two stocks are always solid picks in the energy sector for dividend-focused investors.
Still, there are better and worse times to buy Exxon and Chevron. If you absolutely have to buy an energy stock right now, you wouldn’t be making a mistake if you chose either of them. However, Exxon’s yield is currently around 2.5%, while Chevron’s is 3.3%. Those aren’t outlandishly low figures historically, but during the deep oil downturn during the coronavirus pandemic, Exxon’s yield rose above 10% and Chevron’s above 9%.
To be fair, the oil downturn during the pandemic was unusually deep. However, oil downturns are very common. So if you can be patient, now might not be the best time to buy Exxon or Chevron. If you wait for an oil downturn, their stocks will likely retreat from their current highs, pushing their yields to more attractive levels.
Every investor should have some energy exposure
Energy is vital to the normal functioning of the modern world. You should probably have some exposure in your portfolio, and Exxon and Chevron are both good options most of the time. However, given the volatile history of energy prices, you may want to wait to buy when oil prices, and likely the share prices of Exxon and Chevron, are lower.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
