ExxonMobil (NYSE:XOM) And Chevron (NYSE:CVX) have a growing rivalry. Although they will work together on significant major projects, they are still competitors with their shareholders’ interests in mind. They are currently busy in a court battle over Chevron’s planned acquisition of Hess, one of Exxon’s partners in Guyana. They also regularly compare their key figures and compete with integrated energy companies.
While Chevron has overtaken its larger competitor in some areas, Exxon rules over others. One area where Exxon is much stronger than Chevron is its balance sheet. This gives it greater financial flexibility, which could come in handy in the future.
Exxon’s financial fortress
Exxon ended the first quarter with a debt-to-capital ratio of 16%. This is a low Leverage ratio for the oil company. It is well below the company’s target leverage ratio of 20-25%.
This metric is even lower when you take into account Exxon’s massive cash position. Exxon ended the first quarter with $33.3 billion in cash, up from $31.6 billion at the end of last year, thanks to its strong free cash flow and a commitment to previously suspend stock buybacks Natural Resources Pioneer‘ Special meeting to vote on the pending takeover of Exxon. When cash is included, the net debt-to-capital ratio was just 3%.
The company has enough cash on its balance sheet to fund its dividend expenses about $15 billion per year for two years. It could also fund its current capital spending range, which is $23 billion to $25 billion in 2024, for over a year. This gives the oil giant a lot of cushion. The company could use its cash on hand to fund share repurchases a period of time of Lower oil prices or make an acquisition with cash.
Strong, but not on the level of Exxon
Chevron Strictly speaking has a lower debt-to-capital ratio than Exxon at 12%. However, the company does not have anywhere near the liquidity of Exxon. Chevron’s cash balance at the end of the first quarter was $6.3 billion, down from $8.2 billion at the end of last year, after the company increased its operating cash flow for capital expenditures, dividends and share repurchases at 4.3 and $3 billion had exceeded $3 billion each. This increased the net debt ratio to 8.8%.
That’s still a strong Relationship. Like Exxon, Chevron’s debt target is 20% to 25%. With its net debt ratio well below this rangeIt has enormous financial flexibility. For example, Chevron estimates that with average oil prices in the $50 range during 2025-2027, it can continue to repurchase shares at the low end of its annual target range of $10 billion to $20 billion through 2027 while maintaining debt within its target range .
Although Chevron has a solid cash position, it is nearing its minimum target of $5 billion from Cash on the balance sheet. It would have reached that level in the first quarter had it not issued $1 billion in debt and raised $300 million in cash from asset sales and other sources.
Because Chevron has less cash than Exxon, the company would need to issue more debt to cover future shortfalls between its cash flow and cash expenses. That would increase the interest expense. On the other hand, Exxon can finance any deficits with its huge cash balance for the foreseeable future.
Exxon’s cash war chest offers even more flexibility
ExxonMobil has a much stronger balance sheet than Chevron thanks to its lower net debt ratio and massive cash position. This gives the oil company a much larger buffer to weather any future downturn in the energy market. It could use its cash to fund capital projects, maintain its return on capital, or make an opportunistic acquisition. While Chevron should weather a future storm well, it would need to leverage its balance sheet capacity. That could possibly limit its flexibility if debt markets become disorganized. This is why Exxon is a better option for investors looking for a financial fortress in the oil patch.
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Matt DiLallo holds positions at Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.
Big Oil Battle: Exxon is better than Chevron in this key area, and it’s not even close was originally published by The Motley Fool