Warren Buffett-led Berkshire Hathaway is known for investing in stable, industry-leading companies. Two of Berkshire's top public equity holdings are oil and gas stocks, Chevron (CVX 0.37%) and Occidental Petroleum (OXY -0.15%). Berkshire also owns 92% of Berkshire Hathaway Energy, a stake worth more than its Chevron and Occidental positions combined. It's safe to say that Berkshire likes the energy sector. But it doesn't own the most valuable U.S.-based oil and gas company, ExxonMobil (XOM -2.78%).
If you like ExxonMobil, there's a good chance Chevron and Occidental may be two worthy dividend stocks worth loading up on in January. Here's why all three companies could be worth buying now.
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ExxonMobil is ready to rake in the cash
ExxonMobil is slated to report its Q4 and full-year 2023 earnings on Feb. 2. And while the results probably won't be as good as ExxonMobil's record 2022, 2023 should still be the second-best year in the last decade.
What's more impressive than this year's results is ExxonMobil's plan to grow earnings by $14 billion from year-end 2023 through 2027, assuming a Brent crude oil price of $60.
For context, Brent prices average $100.93 in 2022 and $82.49 in 2023. So how is ExxonMobil planning to substantially grow earnings, even at a much lower oil price? The short answer is cost reduction, portfolio optimization, added earnings from its not-yet-completed acquisition of Pioneer Natural Resources, and growing production from key profitable plays, namely offshore Guyana and the Permian Basin.
There's a lot to like about ExxonMobil's plan:
- It assumes a fairly mediocre oil price.
- It holds the company accountable, not just for a few quarters or this year, but for several years out.
- It leaves room for $20 billion in lower emissions opportunities.
- It includes ongoing dividend raises.
- And it pencils in $20 billion per year in stock buybacks.
The oil and gas industry is prone to big upside and downside swings. But ExxonMobil has the balance sheet capable of weathering the storm. If oil drops below $60 a barrel for Brent, the first move ExxonMobil would likely make is to pull back on stock repurchases. After that, it could reduce capital expenditures.
Oil would have to fall very far and stay down for a while for ExxonMobil to get derailed or cut the dividend. ExxonMobil has increased its dividend for 41 consecutive years, putting it on track to become a Dividend King by 2032.
Chevron can now afford to go on the offensive again
Over the last 15 years, ExxonMobil and Chevron have been trading places between which company is spending more money and has more debt and which company is being conservative. In the mid-2010s, Chevron was spending a fortune on its Wheatstone liquefied natural gas project in Australia, which was completed over budget. After Wheatstone delivered its first cargo in 2017, Chevron pulled back on spending.
At the same time, ExxonMobil ramped up its spending in the years leading up to the pandemic, which left it more vulnerable than Chevron. In 2020, ExxonMobil booked its worst annual loss in company history, losing $22.4 billion, which was four times as much as Chevron.
But over the last three years, ExxonMobil has turned things around. Now both companies have excellent balance sheets and low costs of production, with ExxonMobil lowering its net debt position from $61.6 billion three years ago to under $10 billion today and Chevron reducing its net debt position from $38.2 billion down to $14.6 billion. Not to mention, both companies had a 25% or higher debt-to-capital ratio, which is also far lower today.
XOM Net Total Long Term Debt (Quarterly) data by YCharts
Like ExxonMobil, Chevron is investing in low-carbon fuels to diversify its portfolio and capitalize on the energy transition. Last January, Chevron announced its 36th consecutive year of dividend increases, so we should expect Chevron to comment on the dividend or maybe even announce a raise before it reports earnings on Feb. 2.
Even without factoring in a raise, Chevron yields 4.1%, slightly higher than ExxonMobil's 3.8%.
Occidental is a bold bet on strong oil prices
Berkshire bought more shares of Occidental stock in December, solidifying the company as Berkshire's sixth-largest public equity holding, right behind fifth-place Chevron. And while Berkshire has steadily trimmed its Chevron stake for over a year now, it continues to load up on more shares of Occidental.
Unlike Exxon and Chevron, Occidental is an exploration and production (E&P) company focused on the upstream side of oil and gas rather than the entire integrated value chain. This focus gives Occidental more potential upside from oil, but more potential downside as well. The five-year chart of Occidental is hard to believe.
Occidental has rebounded to around the same level it was trading at five years ago. But during 2020, Occidental stock fell below $10 a share, and there were fears it would go bankrupt. If oil prices had stayed depressed for an extended period, it very well could have, as Occidental was banking on a high oil price after it took on a lot of debt to buy fellow E&P Anadarko Petroleum in 2019. Fortunately, oil prices rebounded toward the end of 2020 and then soared in 2022.
Occidental has spent the last few years using outsized profits to shore up its balance sheet. But it isn't afraid to make big bets. In December, Occidental announced a $12 billion acquisition of fellow Permian oil and gas producer CrownRock.
Unlike ExxonMobil, which is buying Pioneer Natural Resources with stock, and Chevron, which is making its $53 billion Hess acquisition with stock, Occidental is taking on $9.1 billion of new debt and assuming $1.2 billion of CrownRock's existing debt. Just like with Anadarko, Occidental is using leverage to unlock explosive potential profits, while also leaving itself more vulnerable to a downturn.
Occidental is a far riskier investment than Exxon and Chevron. But it's still an oil stock worth buying if you believe oil can stay at least above $70 a barrel WTI -- the level where Occidental claims it can make $1 billion in additional free cash flow.
Occidental's dividend only yields 1.2%, far lower than Exxon or Chevron. Again, the point of investing in Occidental isn't to collect a stable and reliable dividend or achieve diversification. It's to bet on the strength of the U.S. upstream oil and gas industry.
Invest in oil and gas in a way that works for you
Before investing in oil and gas, it's important first to determine which part of the integrated value chain you like the most.
Upstream companies like Occidental tend to offer the highest risk but also the highest potential reward. Midstream companies are known for their slow growth and high dividend yields. The downstream industry is also chock-full of quality dividend payers. And integrated majors like ExxonMobil and Chevron have sizable downstream segments as well.
If you're just starting out, it's hard to go wrong with a well-rounded play like ExxonMobil or Chevron. But if you are looking for an upstream candidate to add to an existing portfolio of oil and gas stocks, Occidental looks like a good buy now, too.
