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Written by Leo Sun for The Motley Fool->
Chevron’s diversification makes it a safe stock to own even if oil prices decline.
Oxy’s upstream exposure makes it a riskier long-term holding.
Over the past three months, WTI crude oil prices have nearly doubled to about $100 per barrel. The main catalyst that drove oil prices higher was the outbreak of the Iran War in late February, which throttled global oil deliveries through the Strait of Hormuz.
That conflict generated fierce headwinds for companies that relied on low and stable oil prices. However, it generated tailwinds for oil stocks like Chevron (NYSE: CVX) and Occidental Petroleum (NYSE: OXY), which have risen 8% and 33%, respectively, over the past three months. Should you invest in either of these oil stocks right now?
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Chevron, one of the world's largest integrated energy companies, operates an upstream business to locate and extract oil and natural gas, midstream pipelines to transport those resources, and downstream refineries and chemical production facilities.
Occidental, more commonly known as Oxy, is primarily an upstream oil and gas company. It also owns a smaller midstream business and a low-carbon ventures business. It sold its downstream and chemical business, OxyChem, to Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) this January for $9.7 billion in cash.
Soaring oil prices usually provide the strongest tailwinds for upstream companies. When oil prices are high, they generate higher profits as their revenue growth outpaces their expenses. But that impact is mixed to neutral for midstream companies, which merely charge "tolls" for the resources flowing through their pipelines, and negative for downstream companies, which struggle if the prices of unrefined crude oil rise faster than those of their refined products.
Oxy has outperformed Chevron since the outbreak of the Iran War because it's primarily an upstream company. Its divestment of OxyChem, which eliminated its downstream exposure and reduced its debt, made it even more appealing. Chevron's upstream business benefited from those higher crude oil prices, but its downstream business faced tougher headwinds.
Oxy might seem like a better oil stock than Chevron amid surging crude oil prices, but it could struggle to outperform the diversified energy giant over the long term. Over the past three years, Oxy's stock has risen only 2%, while Chevron's has rallied 24%.
Chevron's diversified business is built to last through volatile oil cycles. It's raised its dividend annually for 39 consecutive years, and its forward yield of 3.7% should limit its downside. Oxy's business is evolving, but it's much more sensitive to oil prices. The last oil crash in 2020 forced it to cut its dividend, and its low forward yield of 1.7% doesn't offer much downside protection.
Chevron's breakeven price for crude is below $50 per barrel, compared with Oxy's about $60 per barrel. So while both companies are generating plenty of cash in this market, Chevron should hold up better if crude oil prices abruptly collapse.
Assuming oil prices stay high, analysts expect Oxy's EPS to more than double in 2026. They also expect Chevron's EPS to increase 83%.
Yet Oxy trades at just 14 times forward earnings, while Chevron has a higher forward price-to-earnings ratio of 19. Therefore, investors seem reluctant to revalue Oxy as a higher-growth stock because oil prices could pull back sharply if the Iran War officially ends. At the same time, investors seem willing to pay a higher multiple for Chevron because it's a safe-haven dividend stock that isn't overwhelmingly dependent on elevated crude oil prices.
Oxy might continue to outperform Chevron this year, but I don't think it's a better long-term investment. Crude oil prices are notoriously volatile, and I'd prefer to stick with an established, well-diversified market leader like Chevron rather than chase Oxy's short-term gains.
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Leo Sun has no position in any of the stocks mentioned. 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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