Chevron Can't Touch Exxon's Gas Growth

Chevron shares have grown four times faster than Exxon's during the past year, but Exxon could soon reverse the trend. Here's why.
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IRVING, Texas (TheStreet) -- Chevron (CVX) - Get Report shares have grown four times faster than those of rival Exxon Mobil (XOM) - Get Report during the past year. If you bought Chevron shares three years ago, you would have gained 5.6% a year instead of losing 2.4% on Exxon.

But if you're thinking about buying shares today, you should consider

Exxon

, whose stock has fallen to bargain prices. Both companies are expected to report first-quarter profits that doubled when they post results later this week.

Exxon

, the biggest oil producer in the U.S., is positioned to benefit from rising demand for natural gas, a key long-term trend in energy. The Irving, Texas-based company's pending $41 billion acquisition of

XTO Energy

(XTO)

, and other small purchases will help it expand its reach.

Global natural gas demand is expected to increase 1.5% a year until 2041, according to the International Energy Agency. Exxon's acquisition of XTO will diversify its revenue sources, which means the company will be less vulnerable to volatile crude oil prices.

Chevron shares follow oil prices more closely than Exxon's. While the International Energy Agency predicts oil prices to increase to $115 a barrel by 2030 from $85, those prices are likely to swing widely for years to come, which could create uncertainty for Chevron. If global oil demand rebounds, both stocks will benefit.

Both companies offer solid dividends, with yields of 2.4% for Exxon and 3.3% for Chevron. However, Exxon is projected to boost revenue by 29% this year, compared with 23% for Chevron.

In terms of profitability, Exxon also has Chevron beat. With a return-on-equity of about 17% for the past year, Exxon is besting Chevron by 5.5 percentage points.

Despite the weak economy, Exxon has amassed $1.23 per share in free cash flow. Chevron's cash flow is negative, even though its capital expenditures have been similar to Exxon's.

Exxon's natural gas strategy isn't without risks. Advancements in hydraulic fracture drilling have made it easier to tap massive shale gas deposits found across the country. But environmental groups have been concerned that hydraulic fracturing could contaminate ground water because the process involves injecting chemically treated water into the ground. Anti-drilling legislation could hurt Exxon's growth plans.

Beyond its strategic positioning in natural gas, Exxon is looks like a bargain at its current price. While Exxon's forward price-to-earnings ratio of 12 is slightly higher than Chevron's 11, this measure doesn't reflect the companies' potential to expand. If you look at the companies' PEG ratios, a measure that compares prices and expected growth, Exxon comes out on top with a ratio of 0.75 ratio verses Chevron's 1.15. Stocks with PEG ratios of less than 1 are considered cheap.

Institutional investors appear to agree. Since Exxon shares started to deflate late last year, block purchases of the stock have increased dramatically. In contrast, these investors have been selling Chevron shares, reflecting limited optimism about the stock's future growth prospects.

Exxon stock has had the second-worst performance in the Dow Jones Industrial Average during the past year, behind Verizon. The dip offers investors an entry point to a long-term growth stock.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.