Oil and gas producers have provided a bright spot to an otherwise sluggish stock market in 2022. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP -0.84%) has handily outperformed the Dow Jones Industrial Average (DJIA) to start the year.
XOP data by YCharts.
Two energy producers that have benefited from the strength of the energy sector in 2022 are Chevron (CVX -0.83%) and Coterra (CTRA). However, aside from both being energy producers, they differ in considerable ways. So which is the better buy? Here's a closer look.
Chevron: A giant that's picking up steam
Chevron is one of the largest companies in the world. With a market cap of $330 billion, it is the 17th largest American company and the second-largest American energy company, trailing only ExxonMobil (XOM -0.83%).
The company is fully integrated and operates upstream (exploration and drilling), midstream (storage and transportation), and downstream (refining and retail) processes.
Supported by record-high oil prices, Wall Street estimates for Chevron's 2022 earnings have been rising rapidly. Three months ago, the consensus estimate for its 2022 earnings per share was $9.51. Now, the consensus estimate has soared to $13.44 -- a 41% increase.
While the bulk of the increase comes from high oil and gas prices, there are also other factors at play. Chevron announced during a recent investor day conference that it is targeting a 10% reduction in its unit operating expenses by 2026. Furthermore, it set a goal of 12% return on capital employed, also by 2026. The company plans to rely on a mix of cost discipline and capital efficiencies to hit its targets.
Chevron's valuation looks attractive. Its forward price-to-earnings ratio is 14.75 -- below the long-term average of 16.5. Moreover, Chevron pays an annual dividend of $5.68, providing a decent 3.34% dividend yield given its current share price.
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Coterra: Supercharging shareholder returns
Coterra, with a market cap of $21.6 billion, is a fraction of the size of Chevron. Based in Houston, its operations are focused on three major regions:
- The Marcellus shale in Pennsylvania
- The Permian Basin in Texas and New Mexico
- The Anadarko Basin in Oklahoma
In its most recent quarter, 60% of Coterra's revenue was from natural gas production. This is a much higher percentage than Chevron, which generates over 76% of its revenue from downstream operations. With natural gas prices are closing in on levels not seen since 2008, Coterra is well-positioned to benefit from record-high prices.
Henry Hub Natural Gas Futures Contract 1 data by YCharts.
Furthermore, these high prices should result in a flood of cash for Coterra. In the fourth quarter, the company recorded $685 million in free cash flow. It then returned about 60% of that to shareholders. With natural gas hovering near multi-year highs, Coterra should once again be poised to reward its shareholders through a combination of special dividends and share buybacks.
Which company is best?
Both companies offer value to investors. Chevron is a safe play with its massive size, diversified operations, and rock-solid dividend. Coterra, on the other hand, is smaller and more vulnerable to a snap-back in energy prices. However, I prefer Coterra. Unlike Chevron, Coterra generates more of its revenue directly from production. Moreover, its variable dividend model provides better return to investors when oil and gas prices are high -- as they most certainly are right now.
