By Avi Salzman
Both Exxon Mobil and Chevron head into their first-quarter earnings reports on Friday in strong shape. Both companies are growing their oil production, and both have become more efficient at turning that oil into cash. Their balance sheets are more solid than they've been in years, giving investors confidence that the stocks' dividends are safe. Exxon's dividend yield is 3.1% and Chevron's is 3.9%.
Oil prices have also risen in recent weeks as the war in the Middle East has expanded, helping boost oil stocks. The uptick in oil may not be reflected in Exxon and Chevron earnings, however, because it didn't happen until the end of the first quarter. With oil and natural gas prices for the quarter lower than a year earlier, analysts expect Exxon to post earnings per share of $2.19, down from $2.83 a year ago, according to FactSet. Chevron is expected to earn $2.92, down from $3.55.
The size of their earnings declines look similar, and the companies trade at similar valuations -- 12 to 13 times their expected 2024 earnings. But there is an important difference between them that gives Exxon an edge going forward. Exxon owns a large stake in one of the world's most promising oil developments in South America, off the coast of Guyana. Chevron is trying to buy into that project too, agreeing last year to buy New Jersey based producer Hess for $53 billion. Hess owns a 30% non-operating stake in the Guyana project. Exxon owns 45%, and a portion is also owned by CNOOC (China National Offshore Oil Corporation).
It's clear why Chevron wants a piece of the Guyana project. On Thursday, Hess recorded a "huge beat" in its first quarter earnings report, largely because of unexpectedly large production growth in Guyana, according to Raymond James analyst John Freeman. The Guyana development is expected to hold more than 10 billion barrels of oil, a motherlode that could sustain strong and low-cost production for the companies involved for a decade or more.
But Exxon now stands in the way of Chevron's ambitions. Exxon has said that it has a right of first refusal over Hess' stake in the project. The company appealed to the International Chamber of Commerce in Paris, which is expected to decide the case through arbitration. Chevron says Exxon doesn't have the right to block its deal. In a securities filing this week, Chevron said it expects to receive regulatory approvals to buy Hess by the middle of the year, but that the arbitration case could drag things out.
"Hess is seeking to have the merits of the arbitration heard by the third quarter of 2024 and to complete the arbitration by the end of 2024," the company said. "Neither Chevron nor Hess can predict the actual date on which the transaction will be completed because it is subject to conditions beyond each company's control."
The outcome of the dispute matters more for Chevron than Exxon. Investors had preferred Chevron shares early in the pandemic, because the company's balance sheet was considered stronger. They've since changed their bets. Since the start of 2022, Exxon shares have doubled while Chevron's are up 40%.
Exxon spent more heavily to expand production in places like Guyana, securing drilling rights that now set the company up to pump more oil in the years ahead. Chevron was more conservative with its spending. Its growth now hinges in part on the Hess deal. Until it's resolved, Chevron may have trouble catching up to its larger rival.
Write to Avi Salzman at avi.salzman@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 25, 2024 16:17 ET (20:17 GMT)
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