This year, two of the best-performing energy stocks have been Occidental Petroleum Corporation (NYSE:OXY) – 2.27% and Devon Energy Corp. (NYSE:DVN). The stock of Occidental Petroleum Corporation (NYSE:OXY) has gone up by more than 100%, and the stock of Devon has gone up by almost 50%. Both of these stocks have done much better than the S&P 500 and other energy stocks.
Why You Might or Might Not Want to Buy Occidental Petroleum
Earlier this year, Occidental Petroleum Corporation (NYSE:OXY) hit a turning point that was very important. The oil giant reached its short-term goal of lowering its debt, which means it can now start giving more cash back to its shareholders. Occidental Petroleum Corporation (NYSE:OXY) did this by raising its dividend by a huge 1,200% and giving the go-ahead for a $3 billion program to buy back shares.
The company’s short-term goal is to finish that buyback authorization and keep paying down debt. By the end of the year, they want their total debt to be in the high teens. That would make it possible for the oil company to give shareholders more money next year. It thinks that a combination of buying back shares and giving out dividends could bring back $4 per share. If oil prices go up, the company could pay more, but first it would have to start redeeming the $10 billion of preferred stock that Warren Buffett’s Berkshire Hathaway Inc Class A (NYSE:BRK.A) –0.41% Berkshire Hathaway Inc Class B (NYSE:BRK.B) -0.48% owns and that helped pay for its 2019 deal with Anadarko.
Given that it still owes money, shareholders won’t get much back in the near future, especially if oil prices go down. But there is a lot of room for growth if oil prices stay high. Also, there is a small chance that Buffett’s company, Berkshire Hathaway, could make an offer to buy Occidental Petroleum Corporation (NYSE:OXY). It has bought a huge stake in the company. Berkshire now owns more than 20% of Occidental Petroleum Corporation (NYSE: OXY), which is worth more than $11 billion, and it has stock warrants to buy another $5 billion worth of shares.
Why You Should Buy Devon Energy and Why You Shouldn’t
When Devon Energy Corp. (NYSE:DVN) finished merging with WPX Energy last year, it reached a turning point. This deal made it possible for the company to start the first fixed-plus-variable dividend framework in the industry. Under this policy, Devon Energy Corp. (NYSE:DVN) pays a stable base dividend and a variable payment of up to 50% of its free cash flow each quarter. The other half of the company’s extra cash is used to improve its already strong balance sheet, buy back shares, and buy oil properties that bring in money.
Devon Energy Corp. (NYSE:DVN) has already raised its base dividend twice, and its variable payout has been steadily going up. At the price of Devon Energy Corp. (NYSE:DVN)‘s stock right now, the total dividend payment gives an annualized yield of more than 10%. 4% of its outstanding stock has been bought back through its share repurchase program. It also has a balance sheet with a lot of cash and a leverage ratio that is much lower than its target level.
Devon Energy Corp. (NYSE:DVN) has been able to go on the offensive this year because its balance sheet is strong. It has already bought two companies, which will increase its cash flow in the next few quarters and give it more money to raise the dividend.
The bad thing about Devon Energy Corp. (NYSE:DVN) is that its dividends will go up and down with the price of oil. But because it has a lot of cash on hand, Devon can keep buying back shares and could buy more oil properties that bring in cash in the future to help protect its variable dividend from the effects of lower oil prices.
A Better Bet
Warren Buffett is hard to bet against. But Occidental Petroleum Corporation (NYSE:OXY) needs oil prices to stay high so it can pay off its debt and buy back Berkshire’s preferred stock. This is stopping it from giving investors more cash at the moment. Devon Energy Corp. (NYSE:DVN), on the other hand, has already given most of its huge cash flow to its shareholders. It looks like the better oil stock to buy right now because of this.
Featured Image: Megapixl @Alexeynovikov
