The one factor that investors need to understand about the energy sector is that it is volatile. Oil and natural gas prices can, and do, move dramatically and quickly at times. Right now, oil prices are a little soft, and
Occidental Petroleum
's
(NYSE: OXY)
shares are down around 35% from their 52-week highs. Is this a buying opportunity, or a sign that Occidental Petroleum isn't the best oil stock for your portfolio?
What does Occidental Petroleum do?
Occidental Petroleum, or Oxy for short, is a $40 billion
market cap
integrated energy company. Both of those facts are important. Although $40 billion is a big number, it pales in comparison to industry leaders like
ExxonMobil
and
Chevron
, which have market caps of $440 billion and $235 billion, respectively.
On the integrated energy side of things, Oxy produces oil and natural gas, transports it, and processes it. That's the same business model as Exxon and Chevron, just on a much smaller scale. Effectively having exposure to all three segments of the industry (the upstream, midstream, and downstream) helps to soften the peaks and valleys inherent in the commodity-driven
energy sector
.
The problem for Oxy with regard to the diversification of its energy business is that it lacks the scale of its larger peers. So the stock tends to be driven more by energy prices than Exxon or Chevron. The chart below shows what has happened over the past year, as oil prices have weakened. Notice that Oxy's share price has fallen far more than its larger peers' stock prices:
Occidental Petroleum has a plan
Oxy's management team isn't unaware of the issues it faces when it comes to scale. That's why, with the help of Warren Buffett and
Berkshire Hathaway
(NYSE: BRK.A)
(NYSE: BRK.B)
, Oxy directly took on Chevron in 2019. The end result of this standoff was that Oxy bought Anadarko Petroleum out from under Chevron, which had been the first to ink a deal with the company.
That event was a clear indication that Oxy wants to play in the big leagues. It ended up being an important warning for investors, too, when oil prices fell and a heavily leveraged Oxy had to cut its dividend so it could focus on mending its balance sheet. But the company didn't just fall back into line after this misstep -- it has since inked two more acquisitions. Oxy's goal is still very obvious -- it wants to grow.
This is where things start to get a bit more interesting from the investment side. If you are looking for a more growth-oriented energy investment, it could be a good choice for you. Although the company's leverage is still much higher than that of Exxon or Chevron, its leverage profile is also vastly improved over what it was following the Anadarko deal. If management is prudent, and doesn't overreach, it can afford to keep buying its way to growth. However, that also means that excess cash is more likely to be put toward growth than toward dividends.
Indeed, Chevron has a 5% dividend yield, Exxon a 3.8% yield, and Oxy a relatively tiny 2.3% yield. The average energy stock is currently yielding around 3.5%. If you're a dividend investor, Oxy is probably not going to be an attractive stock to add to your portfolio.
Should you buy Oxy?
As with most investments, buying Oxy really depends on what you are trying to achieve. If you want an income-focused energy stock, you'll need to keep looking. If you want a growth oriented energy stock, however, it could be right up your alley. Just make sure you monitor the company's growth efforts to ensure it doesn't bite off more than it can chew again. And go in understanding that price volatility will be something you'll have to accept as this relatively small integrated energy company continues to grow its business.
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Reuben Gregg Brewer
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
.
