If you’re interested in investing in the oil and natural gas sector, a few names stand out above the rest. The “supermajors,” also known as “Big Oil,” are an elite group consisting of half a dozen of the world’s biggest energy companies.
ExxonMobil and Royal Dutch Shell [OTC: RYDAF] are two of these so-called supermajors. Both are in the top 10 companies for worldwide revenue, and both have massive oil and natural gas businesses as well as chemicals and refining.
Although they’re similar on the surface, investing in ExxonMobil and Royal Dutch Shell stock has its own advantages and disadvantages.
The Pros and Cons of Investing in Oil and Natural Gas Companies
The good news for oil and gas investors is that these two commodities will always be in demand. Rough estimates put the petroleum industry at 10 percent of the world’s gross domestic product. With the global population set to grow in the next few decades, oil and gas companies are expected to grow right alongside it.
Another benefit of investing in oil and natural gas is the tax advantages that both companies and shareholders can receive.
In the U.S., 15 percent of gross income from investments in oil and gas limited partnerships can be sheltered from taxes. To encourage the goal of energy independence, many governments also provide various tax incentives to oil and gas companies.
However, one major drawback of investing in oil and gas is the extreme volatility. The market price of oil is always in fluctuation, making it hard to predict where it will go next.
Oil prices are often partially determined by changes in foreign exchange rates, trade policies, and international politics that are difficult or impossible to foresee.
The risks are only amplified if you plan to invest in smaller oil and gas companies, or in new drilling projects that may never get off the ground. Scams are not uncommon in the oil and gas industry, and investors need to make sure they thoroughly vet the recipients of their funds.
Is ExxonMobil Stock a Buy?
One factor that separates ExxonMobil [NYSE: XOM] from Royal Dutch Shell [OTC: RYDAF] is the two companies’ balance sheets. Historically, ExxonMobil has focused on paying down long-term debt rather than putting it to good use.
This means that ExxonMobil [NYSE: XOM] will be in a better, more flexible position during times of industry downturn because it can assume more debt to help the business grow. If you have reason to believe that oil and natural gas is headed for a decline in the near future, then ExxonMobil could be a wise investment.
Another point of difference between ExxonMobil [NYSE: XOM] and Royal Dutch Shell [OTC: RYDAF] is the two companies’ investments in renewable energy.
ExxonMobil appears committed to oil and natural gas as the primary drivers of business growth in the coming decades. The company plans to invest an average of $30 billion between 2023 and 2025 on its capital projects.
Should You Invest in Royal Dutch Shell Stock?
Royal Dutch Shell [OTC: RYDAF], on the other hand, is much more comfortable with taking on long-term debt as a growth strategy. Roughly 20% of Shell’s current capital structure is debt; however, the company also has $20 billion cash on hand to spend in the event of an emergency.
Unlike ExxonMobil [NYSE: XOM], Shell is much more bullish about the prospect of renewable energy, especially as it pertains to climate change. Recent years have seen the company make substantial investments in solar and wind power.
In January 2019, Shell acquired the electric vehicle charging station company Greenlots, which it plans to use as the foundation for its electricity business in North America.
This follows Shell’s 2017 acquisition of EV charging station company NewMotion, which operated 30,000 charging stations across Western Europe.
If you’re pessimistic about the growth of oil and gas, and/or optimistic about renewable energy, then Shell would seem to be the smarter investment.
ExxonMobil Vs Royal Dutch Shell Stock: The Bottom Line
When comparing ExxonMobil vs. Royal Dutch Shell stock, it’s also important to look at the cold hard figures. As of July 2019:
- Shell has a price/earnings ratio of 12.4, while ExxonMobil’s P/E ratio is 17.1. Shell comes out on top here for now, although ExxonMobil [NYSE: XOM] used to have the lower ratio until July 2018.
- The dividend yield of ExxonMobil stock is 4.7%, while Shell’s yield is better at 5.9% (currently the highest of the “supermajors” group).
- ExxonMobil [NYSE: XOM] currently has higher production numbers, with 4.0 million barrels of oil equivalent per day (BOE/D) vs. Shell’s 3.7 million BOE/D. However, ExxonMobil’s production has been falling in the past several years, while Royal Dutch Shell [OTC: RYDAF] has remained constant around 3.7 million BOE/D.
All else being equal, Shell stock seems to outperform ExxonMobil stock in the general case. However, if you have a reason to invest in ExxonMobil shares instead–such as believing that a downturn is imminent – then ExxonMobil [NYSE: XOM] may be the better option for you.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.