The ongoing dispute between ExxonMobil and Chevron over the purchase of Hess’ 30 percent stake in the Stabroek Block could be a decisive factor in determining which of the two energy giants will dominate the stock market this year.
According to Kevin Holt, senior portfolio manager of the Invesco Energy Fund (FSTEX), the resolution of this conflict might tip the scales in Chevron’s favor if settled in 2024.
Holt noted that the U.S. oil majors have experienced a significant rebound in 2024. The anticipated recession and concerns about weak oil demand that weighed heavily on the energy sector last year have not come to pass. This recovery has fueled a resurgence in their stock prices, albeit with a notable difference in performance between the two companies.
ExxonMobil’s shares have surged approximately 15% this year, outpacing Chevron, which has seen a more modest 6% gain. Exxon’s stock reached an all-time high during the oil rally in April, showcasing its dominance over both the energy sector and the broader market, while Chevron has lagged behind.
However, Holt was keen to note that a pivotal factor for Chevron’s performance in the latter half of the year lies in the outcome of its legal battle with Exxon over the Stabroek Block. Exxon currently leads this project with a 45% stake. However, Chevron is poised to enter the fray through its pending acquisition of Hess Corporation, which holds a 30% stake in the Stabroek Block. Although Hess shareholders have approved the merger with Chevron, the deal’s closure remains uncertain, complicated further by Exxon’s legal maneuvers. Exxon has brought Chevron and Hess before an arbitration court, asserting its right of first refusal over Hess’s Guyana assets under a joint operating agreement.
“We’re waiting on the arbitration to see what happens in terms of right of first refusal,” Holt remarked. He noted that both Exxon and Chevron have significant holdings in the Invesco Energy Fund, representing 9.73% and 9.27%, respectively, of the fund’s total assets as of April 30.
Holt expressed confidence that a favorable arbitration ruling for Chevron and Hess could propel Chevron’s stock to outperform Exxon in the latter half of the year. “If Chevron and Hess win the arbitration, I think Chevron will outperform Exxon in the second half of the year, assuming that you get a ruling in the second half of the year,” he said. Conversely, if Exxon prevails, Holt predicts only a marginal outperformance by Exxon, which has already demonstrated robust gains.
Holt revealed that Chevron’s underperformance relative to Exxon this year can be attributed to several operational challenges. The company has faced production issues in the Permian Basin and cost overruns at its Tengiz project in Kazakhstan, both of which have frustrated investors. In contrast, Exxon has navigated 2024 without significant execution problems, bolstering its stock’s performance.
In addition, the portfolio manager said this year’s performance marks a reversal of the trend observed in the decade leading up to the Covid-19 pandemic, during which Exxon consistently underperformed Chevron.
Holt attributed this past underperformance to Exxon’s high capital expenditures during a period of low oil prices. However, since 2020, Exxon has adopted a strategy of capital discipline, which has contributed to its recent outperformance. Investors have also recognized Exxon’s leading position in the profitable offshore oil development in Guyana, further enhancing its stock appeal.
