In today's choppy market, many investors are seeking out the relative safety of oil and gas stocks. And it's no wonder. Most energy stocks have a modest valuation and a decent dividend yield -- offering solid value to investors fleeing the lofty valuations and dividend-free zone of the high-growth technology sector.
So for investors looking to put money to work in the sector, let's look closer at two of the somewhat lesser-known names: Murphy Oil (MUR 2.32%) and Devon Energy (DVN 1.08%).
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1. Murphy Oil
Murphy Oil is an independent oil and gas producer founded in 1950 and headquartered in Houston, Texas. Murphy's operations are based across three regions: Western Canada, Texas, and The Gulf of Mexico. The bulk of Murphy's production (45%) and revenues (61%) come from its offshore wells in the Gulf of Mexico.
With a market cap of $5.3 billion, Murphy is modest in size and conservative in vision. One of its key strategic priorities for 2022 is to reduce its debt. To this end, the company has already redeemed $200 million of debt scheduled to come due in June, and it has increased its debt reduction goal for 2022 to between $600 million to $650 million. Murphy's total debt now stands at $3.4 billion. With free cash flow of $847 million over the last twelve months, management's debt reduction goals look achievable.
NYSE: MUR
Key Data Points
Murphy's focus on debt repayment is already having an effect. One credit rating agency, Moody's, has already boosted Murphy's credit rating, while another, S&P Global, has changed its credit outlook for Murphy to positive -- often a precursor to a credit rating upgrade.
The downside to Murphy's focus on debt reduction is that its dividend yield remains a lackluster 1.99% despite a 40% increase earlier this year.
2. Devon Energy
Devon Energy, based in Oklahoma City, is also an independent oil and gas producer. However, with a market cap of $46 billion, it's roughly 10 times the size of Murphy. Devon's oil and gas wells are spread throughout several American states: North Dakota, Wyoming, Oklahoma, Texas, and New Mexico. However, more than two-thirds of its production comes from the Delaware shale, located in West Texas and New Mexico.
DVN Profit Margin data by YCharts.
Devon's high-margin wells in the region have fueled the company's recent performance. As a result, Devon declared a fixed-plus-variable dividend of $1.27 in the first quarter (its dividend yield stands at 7.27%) and expanded its share buyback program to $2.0 billion.
NYSE: DVN
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Which is the better buy, Devon or Murphy?
With oil and gas prices soaring, both companies have seen their stock prices rip higher. But in the head-to-head comparison, Devon has come out on top.
A $10,000 investment in Devon shares one year ago would now be worth over $28,000, while the same investment in Murphy would be worth about $17,500. With oil still trading above $100/barrel and natural gas hovering near multi-year highs, both companies appear well placed to thrive throughout the rest of 2022.
Yet, in the long term, I prefer Devon to Murphy. Its sizable dividend yield (7.27%) and share buyback program provide downside protection if oil and gas prices pull back from current levels -- a growing possibility given the increasing likelihood of a recession.
