Better Oil Stock: Chevron vs. Occidental Petroleum

Oil prices have skyrocketed this year. Brent oil, the global benchmark, has surged more than 75% to over $105 a barrel. Meanwhile, WTI, the primary U.S. oil price benchmark, has jumped to nearly $95 a barrel.

The rapid rise in oil prices due to the war with Iran likely has you wondering if now’s a good time to invest in oil stocks. Here’s a head-to-head comparison of Chevron (NYSE: CVX) and Occidental Petroleum (NYSE: OXY).

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Chevron and Occidental Petroleum are both global oil and gas producers. Chevron has very balanced operations. It produced 3.7 million barrels of oil equivalent per day (BOE/d) last year, split roughly evenly between its U.S. and international operations. The company grew its output by 12% last year, driven by recently completed expansion projects and its acquisition of Hess. Occidental, meanwhile, produced nearly 1.5 million BOE/d last year, with 84% of its output coming from its U.S. operations. This distinction is noteworthy in the current environment, as Chevron has greater exposure to higher Brent oil.

Chevron’s larger international operations aren’t the only difference between these two energy companies. Chevron is an integrated energy company. Its upstream oil and gas production flows through its midstream transportation assets to its downstream refining and chemicals operations. This integration enables it to maximize the value of its production and helps mute the impact of commodity price volatility.

Occidental Petroleum, on the other hand, has gotten much less integrated. It sold its chemicals subsidiary, OxyChem, to Berkshire Hathaway earlier this year for $9.7 billion in cash. Berkshire, incidentally, owns shares of both Occidental and Chevron, which are its fourth- and sixth-largest holdings.

Occidental Petroleum primarily focuses on drilling unconventional wells in the U.S. It can drill these wells quickly, giving it the flexibility to drill more or fewer wells in response to commodity prices. The downside is that it doesn’t have much visibility into its growth. Occidental’s initial plan for 2026 is to cut capital spending by $550 million, allowing it to invest just enough to grow production by 1%. It could grow faster if oil prices are higher, or keep production flat in a lower-oil-price environment.

Chevron, on the other hand, invests in a mix of shorter-cycle unconventional wells and longer-cycle major capital projects. Those longer-term investments give it much greater visibility into its future growth. It currently has several long-term capital projects underway, providing it with clear visibility into its growth through 2030. Chevron expects to grow its production at a 2% to 3% compound annual rate over the next five years, which should fuel more than 10% compound annual free cash flow growth. Chevron’s robust free cash flow growth rate should enable it to continue increasing its high-yielding dividend (3.5% versus Occidental’s 1.8%). Chevron’s more diversified business mix has supported 39 years of dividend increases, while Occidental has had to cut its payout in the past.

While Occidental Petroleum and Chevron are both leading energy companies, they’re very different. Occidental focuses more on producing oil and gas in the U.S., which gives it more near-term flexibility while limiting its long-term growth visibility. Chevron has a much more diversified business, which has enabled it to deliver a more durable dividend and enhanced long-term growth visibility. Those features make Chevron the better oil stock to buy and hold long-term.

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Matt DiLallo has positions in Berkshire Hathaway and Chevron. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Better Oil Stock: Chevron vs. Occidental Petroleum was originally published by The Motley Fool