Better Buy: Devon Energy vs. Kinder Morgan Stock

The volatility in oil prices this year has gotten investors thinking about which oil and gas stocks should they buy now, and whether they should at all. Devon Energy (DVN -0.01%) and Kinder Morgan (KMI -0.64%) are two popular names on energy investors' lists, with both stocks also offering big dividends to investors. Yet while Devon Energy stock is deep in the red this year after a solid performance in 2022, Kinder Morgan stock has been pretty resilient in recent months. Between the two stocks, though, one appears to be a better bet today.

Kinder Morgan is built to navigate rough waters

Neha Chamaria (Kinder Morgan): Unlike Devon Energy, Kinder Morgan has little direct exposure to oil and natural gas prices since it's a midstream company that primarily transports natural gas and refined products for a fee. That also means Devon Energy stock can prove to be more profitable for investors when oil prices are rising. The reverse, though, is also true when oil prices fall, which is why Kinder Morgan makes for a much more compelling stock to own right now.

Kinder Morgan has the largest natural gas transmission network in the U.S., and almost all of its cash flows are hedged or come from long-term take-or-pay and fee-based contracts. So regardless of where oil prices head, Kinder Morgan continues to provide services under its contracts and generate stable cash flows, which it then uses to spend on growth and dividends.

It's a win-win for energy investors during volatile times. Not only can Kinder Morgan pay steady dividends during such times, but its stock price is also far more resilient than are upstream stocks like Devon Energy, whose cash flows and dividends depend entirely on oil prices.

That's not to say Kinder Morgan is risk-free, though. The company slashed its dividend in 2016 but has transformed itself since and built a much stronger balance sheet over time. That explains why even in an exceptionally challenging year like 2020, when some oil companies cut or suspended dividends, Kinder Morgan increased its dividend by 5%.

Kinder Morgan has massive clout in the midstream space, is exploiting opportunities in the high-potential liquified natural gas (LNG) market, and is determined to reward shareholders consistently with dividends and share repurchases. With a 6.4% yield, Kinder Morgan is a solid stock to buy.

Devon Energy is better placed to deal with a falling North American demand environment

Lee Samaha (Devon Energy): Devon Energy and Kinder Morgan have much in common. They offer heavy exposure to fossil fuels and pay hefty dividends. However, the difference between them makes me think Devon Energy is the better long-term stock for investors. 

Kinder Morgan is an energy infrastructure company owning 83,000 miles of pipelines and 140 terminals alongside natural gas storage facility. In a nutshell, it's a play on the demand for natural gas transportation in and through North America.

Meanwhile, Devon Energy is an oil and gas exploration and production company focused on the U.S., with significant assets in the Delaware Basin. Like so many other companies in the energy sector, it's a play on management's ability to develop reserves, generate cost-effective production, and benefit from rising oil and gas prices. 

In my view, there's one key difference between them that makes Devon the better buy.

Borrowing from the International Energy Agency's outlook, it's clear that both oil and gas demand in North America is expected to decline significantly between 2030 and 2050. However, global demand outside North America will rise slightly. 

Given Kinder Morgan's reliance on demand volume in North America, it raises questions about its long-term growth potential. Falling demand for oil (and gas) in North America would not be good news for Devon Energy either. However, Devon can potentially export its oil production to international markets. As such, I think it's better placed than Kinder Morgan. 

Data source: World Energy Outlook 2022. mb/d=million barrels per day, bcme=billion cubic meters of natural gas equivalent.

The better oil stock to buy

Whether you buy Devon Energy or Kinder Morgan depends a great deal on your risk appetite. Devon Energy offers a massive 10% yield right now, but since its cash flows and dividends ebb and flow with oil prices, it's a more volatile stock. Kinder Morgan, on the other hand, may not offer much in terms of stock price appreciation in a high oil-price environment, but it should still pay stable and growing dividends at all times and display resilience in a low oil-price environment. That's something you may want to consider in the current uncertain macroeconomic environment.