Occidental Petroleum (OXY -0.50%) and Energy Transfer (ET -0.22%) are both energy companies. Either one would give you exposure to the sector, but their businesses are dramatically different. The geopolitical conflict in the Middle East has once again highlighted the world's reliance on oil and natural gas. However, it has also highlighted the importance of understanding how the energy stocks you own make money.
Why you should have energy exposure in your portfolio
The geopolitical conflict in the Middle East has upended the normal flow of oil and natural gas. The Strait of Hormuz, a key transit chokepoint, has effectively been shut down. It is estimated that around 20% of the world's oil and natural gas flows through the strait, so supply is severely constrained right now. Since oil and natural gas are commodities driven by supply and demand, reduced supply has led to rising prices.
Image source: Getty Images.
The world has been shifting away from carbon fuels and increasingly investing in clean energy. However, the conflict in the Middle East is a clear indication that oil and natural gas remain vital to the normal functioning of modern society. In fact, an all-of-the-above strategy is taking shape for the world's energy demand. That means oil and natural gas will likely remain important for decades to come. Thus, a diversified portfolio should include some exposure to oil and natural gas.
Two different options for your energy bucket
That said, the most obvious way to add some energy exposure to your portfolio is to buy an oil and natural gas producer like Occidental Petroleum. Notably, it has operations in the Middle East and Africa, but most of its production and sales are U.S.-based. That means that the company's exposure to the conflict isn't huge.
NYSE: OXY
Key Data Points
Thus, Oxy stands to benefit more from the high prices resulting from the conflict than it is to be negatively affected by it. However, there's a small wrinkle here. The events in the Middle East have again shown that energy prices are highly volatile. Oxy's top and bottom lines are largely dependent on the prices of the commodities it sells, so the company's financial results are also volatile. The stock provides energy exposure but also carries commodity significant risk.
Right now, with energy prices on the rise again, that risk is paying off. But that won't be the case forever. Still, if you believe energy prices are going to continue to head higher in the second half of 2026, Oxy could be the right energy stock for you today. If you are a bit more conservative, however, you will likely prefer Energy Transfer.
Energy Transfer is a midstream master limited partnership (MLP) that owns a large portfolio of energy infrastructure assets across North America. Essentially, it charges energy companies fees for using its assets to move oil and natural gas around the world. The price of the commodities being moved is less important to Energy Transfer's results than the volume. So strong demand is the key to its success.
NYSE: ET
Key Data Points
While demand tends to be strong through the entire energy cycle, Energy Transfer is a slow-growing business. The goal today is to increase the distribution by 3% to 5% annually. The MLP's lofty 6.5% yield will likely make up most of an investor's return over time. That will be a good fit for a dividend investor, but it may not interest more aggressive investors.
Two examples, but not the only options
The truth is, Energy Transfer and Oxy are just two representative options. You could fine-tune your selections even further by including energy giants like Enbridge (ENB +0.82%), Enterprise Products Partners (EPD -0.18%), ExxonMobil (XOM -0.04%), and Chevron (CVX +0.12%), all of which have better dividend histories than Energy Transfer and Oxy, both of which have dividend cuts in their recent pasts.
That said, given Oxy's modest size, it has more growth potential than Exxon or Chevron. And Energy Transfer's yield is higher than both Enterprise and Enbridge. For more aggressive types that believe oil is headed higher still, Oxy could be a good pick. For more conservative types focused on maximizing income, Energy Transfer's high yield could make it a winning pick.
