Long-term investors need to think about both the good times and the bad times when selecting investments. That’s particularly true when it comes to highly volatile areas like energy. The pandemic’s impact on the sector has been very telling, and helps explain why you’ll likely want to stick with giants like ExxonMobil (XOM -5.32%) and Chevron (CVX -6.53%) today.
The short-term story
Since March 15, 2020, roughly the bottom of the last big oil market shock, Kosmos Energy (KOS -13.38%), a small oil producer with a focus on offshore drilling, has seen its stock go up a huge 440% or so. Crescent Point Energy (CPG -10.24%), a small onshore producer in North America, has seen its stock go up even more, advancing over 600%!
It’s hard to look at gains like that and not be attracted to these energy stocks. There has to be something positive going on, though in this case the incredible rebound was related to massive stock price declines (more on this below). Essentially, investors moved past their fear, early in the pandemic, that tiny players like Kosmos and Crescent Point might be forced into bankruptcy by falling oil demand and prices.
Exxon and Chevron are only up around 140% and 85%, respectively, over that same span. Those small energy stocks are running rings around the industry giants. That’s actually not an unusual thing to see, even outside of pandemic-level market dislocations, because smaller oil and gas companies tend to be far more sensitive to energy price changes. And this time around oil has recovered materially since a painful and incredibly rapid price drop during the early days of the coronavirus pandemic, when people staying home led to a swift and steep decline in demand for oil.
Today, with oil prices still toward the high side, it’s more important to look at what happens when oil prices fall. For example, Brent Crude and West Texas Intermediate Crude, two key industry benchmarks, have been in a downtrend over the last few months. Crescent Point and Kosmos Energy have each dropped, down 11% and about 1%, respectively. Exxon and Chevron, with much broader businesses, are up 8% and 5%, respectively.
That said, your view of the market wouldn’t be complete with out a look back to the dramatic hit energy prices took in 2020. During that shocking period, Crescent Point and Kosmos fell roughly 80% each between Jan. 1, 2020 and March 15, 2020. That’s less than three months, though it was a period of great uncertainty and, as noted, there were very real concerns that smaller industry players might not survive. Not many people could have handled such a hit without losing sleep. Exxon and Chevron didn’t sail through that downturn, losing 45% and 30%, respectively, but those are much easier numbers to digest than 80%.
How do they do it?
There’s no particular secret to the greater stability that Exxon and Chevron display, but it pays to remember the basics when small oil and natural gas drillers are capturing investors’ attention because of huge gains.
For starters, both Exxon and Chevron are integrated energy companies. That means they both produce energy and transport and process it. They have exposure to the entire value chain, which helps to smooth financial performance over time because some parts of their businesses (refining, for example) can actually benefit from lower energy prices. Small energy producers generally only focus on the upstream (drilling) business, so their top and bottom lines are totally reliant on energy prices.
In addition to that, Exxon and Chevron have incredibly strong balance sheets. Exxon’s debt to equity ratio is 0.26 times, while Chevron’s is an almost shockingly low 0.17 times. That gives them the financial wherewithal to take on debt during difficult times so they can keep spending on needed capital investments and support their generous dividends. Both are Dividend Aristocrats, despite the highly volatile nature of oil prices. To be fair, Crescent Point’s debt to equity ratio is a modest 0.23 times, but its focus on the upstream gets all of the attention when it comes to investor perceptions. Kosmos’ debt to equity ratio is a much higher 3.4 times.
The safer play
Chevron and Exxon are hardly perfect. For example, they will tend to lag during big oil and gas upswings, as we’ve seen of late. And they aren’t moving as quickly as some of their peers with regard to clean energy investing, which is a long-term issue to consider. However, if you want direct oil and natural gas exposure today, when energy commodities have already seen a massive price increase, you should probably be thinking about downside protection. In that scenario, Chevron and Exxon have historically held up better than small producers like Crescent Point and Kosmos Energy.