Time to Look at 3 Energy Companies With Strong Balance Sheets

In the world of business, a stable balance sheet and a cash reserve are invaluable assets for any company. Excessive debt can burden a company with interest expenses that erode its financial flexibility, making a solid balance sheet an essential component of sound fundamentals, often deserving a premium valuation.

In the cyclical Oil/Energy sector, this financial stability becomes even more critical. No one wants a scenario where plummeting oil prices collide with a heavily leveraged company. During lean years, major industry players may need to borrow to sustain dividends, while smaller entities require cash for sheer survival. Consequently, low debt levels are crucial during downturns. Conversely, when oil and gas prices soar, a robust balance sheet provides a financial stronghold during lean years.

In essence, the sector’s inherently unpredictable nature underscores the significance of maintaining a healthy balance sheet. It’s a strategic imperative that can mean the difference between thriving in times of plenty and surviving the storms of a volatile industry.

Below, we discuss three energy companies with a light debt load, healthy balance sheet, and the willingness to distribute cash to their shareholders. Each of these three companies — Chevron CVX, ExxonMobil XOM and Coterra Energy CTRA — currently carries a Zacks Rank #3 (Hold).

Chevron: Chevron is one of the largest publicly traded oil and gas companies in the world, with operations that span almost every corner of the globe. The only energy component of the Dow Jones Industrial Average, San Ramon, CA-based Chevron is fully integrated, meaning it participates in every aspect related to energy — from oil production to refining and marketing.

The company boasts a clean balance sheet, manifested by its fairly low debt-to-equity ratio. As of Jun 30, CVX had $9.6 billion in cash and cash equivalents and total debt of $21.5 billion with a debt-to-total capitalization of a modest 11.9%, well below the Zacks Oil and Gas Integrated International industry average of 24.3%. This is why the supermajor carries a high investment grade rating of AA from S&P, which translates into low borrowing rates.

Chevron is using its balance sheet strength to pay a safe quarterly dividend of $1.51 per share (or $6.04 per share annualized) and run an outsized stock repurchase program of up to $75 billion.

ExxonMobil: Another bellwether in the energy space, ExxoMobil also has a strong balance sheet. XOM’s optimal integrated capital structure that has historically produced industry-leading returns and an impressive track of capex discipline across the commodity price cycle makes it a relatively lower-risk play in a volatile sector.

ExxonMobil is in excellent financial health. It has a AA credit rating, and used its strong balance sheet to invest throughout the pandemic-driven energy market downturn. With $29.6 billion, the company is awash in cash. Moreover, XOM finished the second quarter of 2023 with a total debt of $41.5 billion and a debt-to-total capitalization of just 15.4%.

The company’s fortress-like balance sheet has allowed it to reward shareholders handsomely. ExxonMobil pays a quarterly dividend of 91 cents per share and is on track to buy back up to $17.5 billion during the year.

Coterra Energy: It is an explorer and producer of oil, natural gas and natural gas liquid. Headquartered in Houston, TX, the firm is focused on the Permian Basin, Marcellus Shale and Anadarko Basin.

CTRA has one of the strongest balance sheets as far as shale producers are concerned, which should help it tide over tough times. The company ended the second quarter with cash and cash equivalents of $850 million and total debt of $2.2 billion, with a very manageable debt-to-capitalization of 14.6%, which is also below the Zacks Oil and Gas Exploration and Production US industry average of 26.4%.

Given its healthy balance sheet, CTRA paid out a base dividend of 20 cents per share. This yields above 3% —  well above the S&P 500 and one of the highest in the upstream energy space. Coterra also has an active share repurchase program, with $1.7 billion existing under authorization.
Chevron Corporation (CVX): Free Stock Analysis Report

Exxon Mobil Corporation (XOM): Free Stock Analysis Report

Coterra Energy Inc. (CTRA): Free Stock Analysis Report

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