Why Oil Giants Like ExxonMobil and Chevron Are Struggling Despite China’s Stimulus Measures

Despite a recent uptick in their stock prices, major oil companies ExxonMobil and Chevron have experienced a downward trend over the past year, lagging behind the broader market.

The S&P 500 has seen a significant 34.3% gain, while these oil stocks have struggled, largely due to weaker oil demand from China—a key player in global energy consumption.

China has introduced a range of economic stimulus measures aimed at reviving its struggling economy, including lowering interest rates, reducing reserve requirements for banks, and providing incentives to boost stock buybacks. Given China’s reliance on energy-intensive industries like manufacturing, these efforts might have been expected to drive up global oil demand. However, this has not been the case. The market appears more focused on supply-side factors, particularly policies from the Organization of Petroleum Exporting Countries (OPEC) and its partners, which are influencing oil prices.

OPEC+ countries, which accounted for 59% of global oil production in 2022, play a critical role in setting the tone for the oil market. Recent discussions about potential increases in oil production have put downward pressure on prices. West Texas Intermediate (WTI) crude oil prices have dipped into the high $60-per-barrel range, while Brent crude prices are hovering just above $70, marking the lowest levels of the year.

The prospect of higher oil production could exacerbate the challenges faced by companies that have heavily invested in expanding their output. For example, Occidental Petroleum and Devon Energy, which made multibillion-dollar acquisitions, now face scrutiny as declining oil prices make these deals appear less attractive in hindsight.

Despite the current headwinds, ExxonMobil and Chevron remain two of the most attractive dividend-paying stocks in the energy sector. Both companies have diversified business models that allow them to weather fluctuations in oil prices. ExxonMobil recently completed its acquisition of Pioneer Natural Resources, while Chevron is progressing with its acquisition of Hess, pending regulatory approval.

Both companies have focused on financial discipline in recent years, improving their balance sheets by reducing leverage. Their geographically diverse portfolios and strong refining and low-carbon fuel segments make them less vulnerable to price swings compared to companies solely focused on oil and gas exploration.

ExxonMobil and Chevron also have a long history of paying out reliable and growing dividends. ExxonMobil has increased its dividend for 42 consecutive years, while Chevron has done so for 37 years. With yields of 3.3% and 4.5%, respectively, these companies offer attractive returns for income-focused investors. Even in times of lower profitability, their payout ratios—45.7% for ExxonMobil and 62.2% for Chevron—remain sustainable.

While the oil sector faces ongoing challenges, including fluctuating prices and uncertain demand from China, ExxonMobil and Chevron are well-positioned to manage these pressures. Their diversified operations and commitment to shareholder returns make them appealing options for investors seeking steady income. Additionally, both companies are preparing for a future where lower oil prices may persist, with strategic plans in place to maintain profitability even in a subdued price environment.

With input from Reuters, Business Insider, and The Motley Fool.