Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Oil Majors Are Beating Tech in Mid-2026
Transcript
- Lucas: Let's start with a number that caught my eye this morning. The S&P 500 sits at 7,458, basically flat over the past week. But underneath that flat headline, there's a pretty clear rotation happening. Luna: The NASDAQ is down 1.4 percent in the last five days. That's the biggest divergence between the two indices we've seen in a while. Lucas: Exactly. And while tech gets most of the attention, the quiet winners this week are the oil majors. Chevron up 2.8 percent in five days. ExxonMobil up an even 2 percent. Both beating every megacap tech stock except Apple. Luna: Apple had a monster week — up 5.2 percent. But the other FAANG names are mostly red. Meta down 1.6, Alphabet down 1.6, Tesla down 3.5. Lucas: Right. So the question is: why are investors rotating into energy now? It's not just a commodity spike — crude has been range-bound around $80 for weeks. This is about something else. Luna: I think it's about capital returns. Chevron and Exxon are printing cash and sending it back to shareholders at a pace that tech can't match right now. Lucas: That's the core thesis. Let's put some numbers on it. Chevron's trailing twelve-month free cash flow yield is around 8 percent. Exxon's is pushing 9 percent. Compare that to Microsoft at roughly 2 percent or Alphabet at 3 percent. Luna: And those tech companies are spending enormous sums on data centers and AI infrastructure. Their capex as a percentage of revenue is at decade highs. Lucas: Meanwhile, Exxon and Chevron are past the peak of their own capex cycle. The Permian basin is largely developed. The Pioneer acquisition that closed last year for Exxon — $64 billion — is starting to show up in the numbers. Integration costs are coming down, and the combined acreage is producing at lower unit costs than either company could achieve alone. Luna: So the market is rewarding discipline. These companies aren't chasing production growth at any cost. They're running the business for free cash flow. Lucas: And that's exactly the playbook that worked for Apple and Microsoft in the 2010s. Mature companies that stop reinvesting every dollar into growth and start returning capital to shareholders tend to see their multiples expand. Luna: I think that's worth pausing on. If today's episode has helped you think about the oil majors or capital allocation differently, honestly, that's the link — buy me a coffee dot com slash fexingo. It's the smallest possible ask, and it keeps our research ad-free. Lucas: Yeah, listener support really does make a difference. We don't have sponsors, we don't run ads — it's just us and the research. So if the show's added value for you, that's the place. Luna: Back to the oil story. Lucas, you mentioned multiples expanding — are we seeing that already with Chevron and Exxon? Lucas: We are. Chevron trades at about 14 times forward earnings. Exxon at 13. That's a premium to their five-year averages of around 11 and 10, respectively. But it's still a discount to the S&P 500 at 22 times. Luna: So there's room for multiple expansion if the market decides these are steady cash generators rather than cyclical commodity plays. Lucas: Exactly. And the buyback programs are massive. Exxon authorized a $30 billion buyback program for this year — that's roughly 7 percent of its market cap. Chevron's program is about $20 billion, or 6 percent. Luna: Combine that with a dividend yield north of 3 percent for both, and you've got a total shareholder yield approaching 10 percent. That's hard to find anywhere in the market right now. Lucas: And it's not just financial engineering. These companies are actually growing production modestly — enough to offset natural decline — without needing to overinvest. The Pioneer acquisition gave Exxon access to some of the lowest-cost barrels in the world, while Chevron's Permian assets are generating returns on capital employed above 20 percent. Luna: That return on capital number is key. Because if you're a long-term investor, you want to see that the company can reinvest its own cash at high rates. Energy companies historically haven't been great at that. Lucas: No, they haven't. The old model was: drill more, produce more, and hope prices cooperate. What's changed is that management teams now tie executive compensation to return on capital and free cash flow targets. The incentives are aligned with shareholders for the first time in decades. Luna: Is this a structural shift, or just a cyclical moment? Because we've seen energy rallies before that fizzled when oil prices dropped. Lucas: That's the million-dollar question. My view is that it's partly structural. The majors have fundamentally changed their capital allocation framework. But the macro backdrop matters too. Global oil supply is constrained by OPEC+ discipline and underinvestment in new projects over the past five years. Luna: The Dallas Fed President Logan came out last week saying rates need to go 'modestly' higher. That's typically bad for growth stocks but could support energy if demand stays resilient. Lucas: Right. Higher for longer rates compress valuations on long-duration assets — which is basically what tech stocks are — but cash flow generating businesses like oil companies benefit from the higher discount rate applied to future cash flows. In other words, the present value of their near-term dividends and buybacks looks more attractive. Luna: So the rotation we're seeing makes sense from a DCF perspective. But what about the risk of recession? If global GDP slows, oil demand falls. Lucas: That's the biggest risk. But look at the resilience of demand so far in 2026. U.S. oil demand is running at 21 million barrels per day, essentially flat year-over-year. China's demand is still growing, albeit slower. And supply is tight enough that even a modest demand decline might not crater prices. Luna: Also, both companies have break-even prices well below $50 a barrel. So even if crude drops to $60, they're still generating free cash flow. Lucas: That's the margin of safety. Chevron's all-in break-even is around $35 per barrel. Exxon's is closer to $40. With crude at $80, they've got huge buffers. Luna: Let's talk about the competitive landscape. Do you see any threat from the big tech companies moving into energy? We've heard rumors about Microsoft and data center operators signing direct PPAs with renewable developers. Lucas: Renewables are a different market. The oil majors are increasingly investing in carbon capture and hydrogen, but their core business is still oil and gas. Tech companies are massive buyers of renewable power, but they're not competing with Chevron and Exxon in upstream production. Luna: So the competition remains within the sector. And on that front, Chevron and Exxon have the scale and the cost advantages that smaller independents can't match. Lucas: Exactly. The independent E&P companies — think ConocoPhillips, Devon Energy — have also become more disciplined, but they lack the diversification of the majors. Exxon has its chemical and lubricants businesses. Chevron has its trading arm and a growing renewables portfolio. Luna: One concern I hear from investors is about peak oil demand. If we're approaching a peak in the next decade, why own these stocks? Lucas: That's a legitimate worry, but the timeline matters. Even in the most aggressive net-zero scenarios from the International Energy Agency, oil demand doesn't fall off a cliff until after 2030. And in the meantime, these companies are returning enormous amounts of capital. You could argue that the market is pricing in a terminal decline that may not materialize for 15 or 20 years. Luna: And if peak demand does come, Exxon and Chevron have the balance sheets to pivot. They could become the low-cost producers that survive a shakeout. Lucas: That's the ultimate bull case. In a declining industry, the low-cost producers with strong balance sheets often become quasi-monopolies. Think of what happened to the steel industry after 2000. The survivors generated outsized returns. Luna: So for investors looking at this rotation, would you recommend buying Chevron and Exxon today? Lucas: I think they're reasonable holds if you're looking for income and some capital appreciation. But I wouldn't chase the week's move. The energy sector is volatile. If you buy today and crude drops 10 percent, you'll probably be down in the short term. Luna: So dollar-cost averaging makes sense. Or waiting for a pullback. Lucas: Exactly. The thesis is structural, not tactical. If you believe in the capital return story and you're willing to ride out commodity cycles, then these are among the most shareholder-friendly businesses in the S&P 500. That's a bet I'm comfortable making. Luna: Alright, I think we've covered it. For listeners, keep an eye on crude prices and the next Fed meeting. Those will be the two biggest catalysts for this trade. Lucas: And if you want to dig deeper, the next episode will be on how the same capital return discipline is playing out in another unlikely sector: big pharma. See you then.