A Surprising Oil Major Pick

I’m sure it drives my editors here mad, but I usually write my piece here on Friday morning, just before it goes out to you, the reader. To be honest, that is in part due to the usual tendency of a writer towards procrastination, but it also enables what I write to be up to date and relevant when you read it. This morning, my late delivery is paying dividends as it enables me to give a “hot take” on two big oil earnings reports.

Both Chevron (CVX) and Exxon Mobil (XOM) released Q3 results this morning. When looked at on a historical basis, neither were great, as both showed significant declines from the same quarter last year. Still, when it comes to earnings, everything is relative, and XOM is trading higher this morning after beating expectations, while CVX’s miss has resulted in a drop in the stock.

However, even though XOM beat and CVX missed, I still prefer CVX as an investment right now.

When analyzing markets and individual stocks, I take what is known as a “top down” approach, which is to say that I start with the big picture of global economics and growth, then drill down by country, sector, industry and finally individual stocks. In this case, it is the “big picture” view that causes me to favor CVX over XOM.

What has become clear over the last year or so is that while global growth is slowing, the U.S. economy is holding up well. That is why, despite the fears that are holding back oil prices, U.S. stocks are at record highs. That matters in a comparative analysis between these two stocks because Chevron is far more U.S.-focused than Exxon Mobil.

A quick breakdown of the results released this morning shows that $1.116 billion of Chevron’s total Q3 earnings of $2.58 billion, or 43.25% of total profit came from U.S. oil and gas operations. Exxon, on the other hand, generated $710 million of their total $3.17 billion, or 22.4%, from U.S. oil and gas. (Sourced from the earnings releases of CVX and XOM.

Under normal circumstances, greater geographic diversity is a good thing and eventually, it will benefit Exxon. For now, though, with the U.S. economy leading the world, I would rather own CVX than XOM.

There is another reason for that preference too, also based on geography.

The Permian basin is the center of the U.S. shale boom, and for good reason. Oil there is plentiful and, with modern technology, relatively inexpensive to extract. In the Spring, both companies announced plans to expand in the region, bringing their industrial scale production to an area previously dominated by small E&P firms. Exxon started from a bigger base there than Chevron and still produces more, but, as I said, everything is relative and Chevron’s rapid expansion in the region gives them more room to grow.

That is why, as counterintuitive as it sounds, I prefer Chevron over Exxon Mobil over the next few months, even though they just released an earnings miss and Chevron beat analysts’ expectations.