Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Chevron Corporation (CVX), Exxon Mobil Corporation (XOM), EOG Resources Inc (EOG): Is It Time to Abandon Big Oil?

Take a chart of the S&P 500’s performance over the first half of this year and compare it to the performance of oil behemoths Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) and you notice that these two companies have seriously under-performed. As I write, the S&P is up 18% year-to-date, while ExxonMobil and Chevron are only up 3.2% and 12.6% respectively. Even including annualized yields of 2% and 3%, these returns come nowhere near the rest of the index.

Investors are getting bored; it would appear that big oil is no longer exciting, and growth has become elusive. Spending is rising, putting valuable dividends in jeopardy. During the last quarter, Exxon Mobil Corporation (NYSE:XOM) increased capital spending by 10%, only to see its cash flow deteriorate by 25%. Chevron Corporation (NYSE:CVX), on the other hand, increased capital spending by 29% and saw its cash flow fall a similar 22%.

Chevron Corporation (NYSE:CVX)

Cash flow critical

What has raised more concern among investors is the lack of free cash flow available to pay the dividend and finance buybacks. For example, during the second quarter, Chevron Corporation (NYSE:CVX)’s operating cash flow was $8.5 billion but the company spent $8.6 billion on capital expenditures. A $500 million sale of assets bolstered cash flow, but this left nothing for the $2.9 billion in dividend and stock repurchase commitments.

Elsewhere, Exxon Mobil Corporation (NYSE:XOM) is experiencing the same issues. Operating cash flow was $7.7 billion during the second quarter and capex spending was $8.7 billion, leaving no cash for the $2.8 billion in dividend and $4 billion in stock repurchase commitments.

However, management is not worried at either company. Exxon Mobil Corporation (NYSE:XOM) only has $15 billion in net debt compared to $341 billion in assets, and Chevron Corporation (NYSE:CVX) has debt of $20 billion with $22 billion in cash and short term investments.

Outlook is cloudy

Drilling and exploration in many regions are now proving to be more expensive and capital intensive than many first forecast. Costly setbacks in the Arctic, offshore, ultra-deep-water, and oil sands have proved these assets to be worth less than initially expected. That said, big oil does now have exposure to the US oil revolution, which it is making use of, but shale production is also more costly than conventional oil fields.

A better play

EOG Resources Inc (NYSE:EOG) is a much better play on oil production in the U.S. The company has two solid positions in North Dakota’s Bakken and South Texas’ Eagle Ford plays that have led analysts to predict a 35% rise in oil production this year. Both Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) expect oil output to fall between 1-2% this year.

EOG Resources Inc (NYSE:EOG) has noted a rapid rise in operating cash flow as its projects come online. Income before tax is up around 100% year-on-year and free cash flow is positive — so positive, in fact, that the company has notched a 340% rise in cash and short term investments from the same period last year.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.