ExxonMobil(NYSE: XOM) is outperforming the S&P 500 and the energy sector so far this year. Brent crude oil prices (the international benchmark) are up 10.9% year to date. So, you may think that other energy majors would be keeping pace with Exxon, but this hasn't been the case.
Chevron(NYSE: CVX) and Norwegian giant Equinor (NYSE: EQNR) are underperforming the S&P 500. Here's why Exxon, as well as these two high-yield energy majors, are worth a closer look, and why Chevron and Equinor could be even better passive income plays than Exxon right now.
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The consensus king of the oil patch
One of my favorite Warren Buffett quotes is, "You pay a very high price in the stock market for a cheery consensus." And although ExxonMobil's 13.1 price-to-earnings (P/E) ratio isn't necessarily expensive, Exxon is one of the most "in-favor" oil majors right now.
Exxon checks all the boxes. Its merger with Pioneer Natural Resources shouldn't face any hiccups and will significantly boost its position in the short-cycle Permian Basin. Exxon's second crown jewel is Guyana.
On March 15, Exxon announced its first discovery of 2024 in the Stabroek block, which adds to over 30 discoveries Exxon has made offshore Guyana since 2015.
In the fourth quarter of 2023, Exxon produced 440,000 barrels of oil per day offshore Guyana. Its Payara project came online ahead of schedule and is targeting 220,000 barrels of oil per day, building on top of Liza Phase 2 (also 220,000 barrels per day) and Liza Phase 1 (120,000 barrels per day). A fourth floating production, storage, and offloading vessel, part of the Yellowtail project, is expected to begin production in 2025, adding 250,000 barrels per day.
Exxon has a balanced production mix led by short-cycle onshore Permian Basin wells and the longer cycle offshore development of the Stabroek block. It has made improvements to its cost structure, has an impeccable balance sheet, has optimized its portfolio, and is committed to the dividend -- with 41 consecutive years of dividend raises. With diversification in its upstream portfolio, paired with downstream assets, Exxon is the complete package when it comes to oil and gas stocks.
Chevron's nagging uncertainty
The main reason why Chevron may be underperforming Exxon this year is uncertainty regarding its merger with Hess.
Hess Guyana Exploration has a 30% stake in the Stabroek block, but Exxon Guyana operates the block with a 45% stake. CNOOC Petroleum Guyana has the remaining 25% interest.
It is understandable why Exxon wouldn't be thrilled to join forces with one of its top offshore Guyana competitors. After all, Chevron announced its merger with Hess just 12 days after Exxon's Pioneer announcement. If Exxon could move forward with its megadeal while stymieing Chevron's merger and acquisition (M&A) efforts, it could work in its favor.
The drama intensified in late March when CNOOC joined Exxon in filing arbitration claims against Chevron's merger with Hess. Chevron published a regulatory filing on March 28 that discussed the deal, reiterating that it and Hess don't believe that the right of first refusal applies to the merger.
It remains to be seen if Chevron can complete the Hess merger. But there's no denying there are more question marks with Chevron than Exxon. The good news is that Chevron is still a great buy even if the Hess deal falls through.
Chevron has 37 consecutive years of dividend raises and recently boosted its dividend by 8%. It yields 4.1% -- higher than Exxon's 3.3% -- while sporting a similar P/E ratio.
Chevron also has a balanced portfolio and plenty of growth potential in the Permian Basin. Given its stock isn't expensive, Chevron could simply repurchase shares, target a different acquisition, or accelerate dividend growth if the Hess deal falls through.
All told, Chevron is still an excellent oil major, and could be an even better passive income source than Exxon -- given its higher yield.
Equinor's yield is too good to ignore
Equinor is the best oil major to buy now if you are looking for passive income. Unlike other majors, Equinor has not made a massive oil and gas acquisition -- partly because of its emissions reduction targets.
Equinor is 75% owned by the Norwegian state and Norwegian private owners -- so adhering to Norway's changing energy policy is a given.
Instead of doubling down on fossil fuels, Equinor is investing in renewable energy, buying back a boatload of stock, and paying sizable dividends. Factoring in both ordinary and extraordinary dividends brings Equinor's quarterly dividend to $0.70 per share -- a forward yield of over 10%!
Analyst consensus estimates forecast $2.96 in 2024 earnings per share (EPS) and $3.19 in 2025 -- down from the $3.93 it earned in 2023. Still, Equinor sports a mere 8.7 forward P/E -- below Exxon and Chevron. It is common for the European majors to trade at a discount to their U.S. peers, and you can see that theme play out in the forward valuations.
XOM PE Ratio (Forward) data by YCharts
Given the high yield and inexpensive valuation, you may be wondering why Equinor is down over 14% year to date while the sector is up. The underperformance could be due to Equinor's capital return program likely being a temporary boost rather than something to be expected long-term. There's also a lot of uncertainty surrounding the profitability of its renewable investments. And, maybe most importantly, the market is cheering aggressive oil and gas investment and M&A activity (think Exxon), whereas Equinor is embracing the energy transition.
Investors who believe energy majors should be taking advantage of higher oil prices by diversifying into renewable energy should consider Equinor.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BP and Chevron. The Motley Fool recommends Equinor Asa and Pioneer Natural Resources. The Motley Fool has a disclosure policy.
