One of the biggest headlines from the 2023 Berkshire Hathaway annual meeting was that the company continued to sell Chevron (CVX 0.26%) stock in Q1 2023. In fact, Chevron has now slipped to its fifth-largest public equity holding, down from its previous rank at number three.
Even so, Berkshire had $21.6 billion worth of Chevron stock as of March 31. Occidental Petroleum (OXY 0.02%), an oil and gas exploration and production company, is Berkshire's seventh-largest holding with a fair value of of $13.2 billion.
Asked about Oxy during the annual meeting, Buffett said that Berkshire was happy with its Oxy shares, was not seeking full control of the company, and seemed to indicate it would possibly buy more in the future but didn't feel rushed. After all, Berkshire's investment in Oxy also includes warrants that allow Berkshire to purchase up to 83.86 million shares of Occidental common stock at an exercise price of $59.62 per share (just a tad higher than its current price).
Investors looking for opportunities in the energy sector have come to the right place. Chevron and Oxy both stand out as oil and gas leaders. But one stock is the better buy now. Let's see which one.
Image source: Getty Images.
Oxy finally has its ducks in a row
On Tuesday, Oxy reported lower-than-expected revenue and adjusted earnings per share (EPS). However, its results are still incredibly impressive.
Oxy raked in $1.41 billion in free cash flow (FCF), adjusted EPS of $1.09, and diluted EPS of $1.00. Total U.S. production was up 13.2% compared to Q1 2022, surpassing 1 million barrels of oil equivalent per day. Even though oil and gas prices are down big from their 2022 highs, Oxy is proving it can still perform well in this environment and generate plenty of FCF to buy back stock and pay dividends.
Oxy deserves a lot of credit for completely transforming its business over the last few years. The Oxy of today sports a healthy balance sheet with low debt-to-capital and financial-debt-to-equity ratios. This is a stark contrast to the Oxy of only a few years ago.
OXY Net Total Long Term Debt (Quarterly) data by YCharts
In 2019, Oxy leveraged up and went on a Permian Basin buying spree, including the acquisition of Anadarko Petroleum. It was ill-timed as the COVID-19 pandemic brought the oil and gas industry to its knees. Oxy entered the 2020 downturn particularly vulnerable as its high cost of production -- paired with its weak balance sheet -- made it ill-equipped to combat lower oil and gas prices. There's no denying that the relatively short downturn was a stroke of luck for Oxy. And if the downturn had lasted for an extended period of time, the company would have been in dire straights.
However, Oxy's gamble ultimately worked out well enough. The company made so much money in 2021 and 2022 that it was able to restore order to its balance sheet as well as improve the cost profile of its production portfolio.
I wouldn't touch Oxy with a 10-foot pole in 2019 or 2020. But today the stock makes a lot of sense, sporting a reasonable valuation and a lot of growth potential. Oxy has a uniquely attractive portfolio given its concentration in the Permian Basin. The region is chock-full of oil and gas reserves and has made sizable improvements in its storage capabilities and pipeline capacity for transporting oil and gas to the U.S. Gulf Coast. Investment in liquefied natural gas (LNG) export terminals along the Texas and Louisiana coasts also benefits Permian producers like Oxy. In this vein, Oxy is well-positioned to benefit from increased U.S. oil and gas exports, even if domestic consumption stagnates.
My biggest fear with Oxy is that it reverts back to its aggressive ways. And if that were to happen at the expense of the balance sheet, then the investment thesis for Oxy would break. However, the company's actions show that it is conducting its business much more carefully.
The safer bet
Chevron has Oxy beat in a lot of important categories -- the biggest one being dividends. Chevron has 35 years of consecutive dividend increases, which provides investors with a steady stream of passive income they can count on no matter the market cycle. Chevron also has a higher dividend yield at 3.8%, compared to Oxy's 1.3%. In 2020, Oxy cut its dividend from $0.79 per share per quarter down to just $0.01 per share per quarter, and has only recently begun bringing back the dividend.
Chevron is also a far more diversified company, both in terms of its business segments and geographic exposure. While Oxy is concentrated in upstream oil and gas production in west Texas, Chevron sports a portfolio of assets that spans the globe. And Chevron also has a sizable Permian Basin presence. Oil and gas are inherently cyclical, so it helps when a company can combat cycles with diversification.
As impressive as Oxy's debt reduction has been, its balance sheet isn't even close to the security that Chevron brings.
CVX Net Total Long Term Debt (Quarterly) data by YCharts
Despite being a far larger company, Chevron has less than half the net debt as Oxy. The balance sheet is in such good shape that management has discussed on recent earnings calls that there is no real sense in paying down more debt, even if it has the cash to do so. Instead, cash can be better spent reinvesting in the business, buying back stock, or simply raising the dividend.
The better buy now
Consistency and financial health are particularly important given the volatile nature of the oil and gas industry. Chevron has an unmatched track record of dividend raises, timely acquisitions, and not overexpanding during boom times.
In an environment of high oil and gas prices, Oxy stands to benefit more than Chevron due to its upstream-focused business. But Chevron has a better all-around risk/reward profile than Oxy, especially given that Oxy has rebounded so much from its 2020 lows. Risk-tolerant investors may want to consider picking up shares of both companies. But for investors that like safe stocks with nice dividends, Chevron is the better buy.
