By LIAM DENNING
A decade ago, Chevron's market capitalization of $70 billion was half the size ofRoyal Dutch Shell RDSB.LN +0.07% 's. This year, though, Chevron has opened up a lead: Worth $232 billion, it is now the second largest of the Western oil majors, trumping Shell's $215 billion.
It isn't first time Chevron has overtaken Shell; it nudged ahead briefly in the depths of the financial crisis and last October. But this lead looks more sustainable—and points to important differences in the two oil majors' strategies and performance.
In broad terms, Chevron has managed to grow without sacrificing returns. This is no mean achievement when you produce more than 2.5 million barrels of oil equivalent a day, output from existing fields declines at 4% a year and much of the world's oil and gas is walled off.
In 2004, Chevron's oil-and-gas output was less than two-thirds that of Shell. By last year, it was 80%. In its latest strategy presentation given earlier this month, Chevron targeted production in 2017 to hit 3.3 million barrels of oil equivalent, or BOE, a day, which is what Shell produced in 2012. Shell's latest target is to produce about four million BOE a day in 2017 or 2018, which would get it back to where it was in 2002 after years of decline and stagnation. On that basis, therefore, Chevron should keep closing the gap.
And while growth targets from oil majors are often more honored in the breach, Chevron's look more realistic in relative terms. Rystad Energy, a consultancy, estimates that production from Chevron's existing projects and those already under development should be pretty steady out to 2019. That provides a solid base on which to build growth from undeveloped discoveries. In contrast, output from Shell's existing production and projects under development is estimated by Rystad to fall 11% by then.
But in the oil business, quantity is just one part of the equation. The real test is profitability. This is where Chevron has really opened up a gap. Since late 2009, it has earned more net income per BOE even than Exxon Mobil, XOM -0.36% long the industry leader. With regards to Shell, back in 2002 both it and Chevron earned around $5 per BOE, according to IHS Herold, an energy-focused analysis firm. By 2011, the latest year for which IHS has data, Chevron's figure had soared to almost $26, 53% higher than Shell's.
In part, this reflects Shell's gassier profile. Similar to Exxon, Shell has become more of a gas major over the past decade, even as oil's price premium to gas has widened. Since 2004, its oil production has declined by a staggering 27% against a 3% increase at Chevron, according to IHS. Last year, just over half of Shell's output was oil, against more than two-thirds for Chevron.
Shell has similarly lagged behind in return on investment. After its reserves-reporting scandal in 2004, Shell increased capital expenditure heavily. By 2008, it was spending virtually all its operating cash flow in this way, while Chevron was spending only 62%.
A rapid increase in capital employed will depress returns until new investments start generating cash, which can take many years in the case of new oil-and-gas fields. Consequently, Shell's return on average capital employed has languished in the low-teens over the past few years, while Chevron's has been closer to 20%.
Shell is paying shareholders a hefty dividend yield of 5.4% to wait until it delivers growth. Chevron's dividend yield is just 3.2%. Add in stock buybacks, though, andDeutsche Bank DBK.XE -4.35% analyst Paul Sankey estimates the two companies will yield about the same in terms of total cash return this year. Good growth prospects and a decent payout? In this business, that almost deserves a medal.
Write to Liam Denning at email@example.com