Better Oil Stock: Chevron vs. Devon Energy

When it comes to investing in the oil industry, there are numerous options available, each with its unique approach. Two prominent players, Chevron (CVX) and Devon Energy (DVN), offer distinct advantages, catering to different investor preferences. Let's delve into the key factors that set these two companies apart and help you make an informed decision.

Diversification vs. Focus

Chevron, a global energy giant, operates across the entire energy value chain, from upstream (drilling) to midstream (pipelines and storage) to downstream (refining and chemicals). This diversification helps to mitigate the impacts of volatile oil prices on its financial results. When oil prices are low, Chevron's refining operations can still generate revenue by processing crude oil into other products, offsetting the impact of low oil prices on its upstream operations.

In contrast, Devon Energy is a pure-play upstream company, focused solely on producing oil and natural gas. As a result, its financial results are more exposed to oil price volatility. When oil prices rise, Devon Energy's financial performance improves, but it also faces the risk of weaker results when prices fall.

Dividend Policy: Consistency vs. Volatility

Chevron's dividend policy is characterized by consistent growth, with the company increasing its dividend annually for 37 consecutive years. This consistency is achieved through its diversified business model and modest use of leverage. Chevron's low debt-to-equity ratio (around 0.17) allows it to take on debt during industry downturns to fund capital investment needs and dividends, ensuring the sustainability of its dividend.

Devon Energy, on the other hand, has a variable dividend policy that ties dividends to its business performance. This approach allows the company to reward shareholders during good times but exposes investors to the risk of dividend cuts during downturns. Devon's higher debt-to-equity ratio (around 0.62) provides more financial flexibility but also exposes it to more risk during industry downturns.

Leverage and Industry Downturns

Chevron's low leverage levels allow it to weather industry downturns more comfortably. During the 2020 oil downturn caused by the COVID-19 pandemic, Chevron's debt-to-equity ratio roughly doubled, but it was still able to continue paying dividends and investing in its business. Once oil prices recovered, Chevron paid down its debts, leaving it ready for the next downturn.

Devon Energy's higher leverage exposes it to more risk during industry downturns. However, its variable dividend policy helps it to preserve capital and weather downturns by cutting dividends during tough times. This policy allows Devon to maintain a consistent dividend payment history, despite its higher leverage.

In conclusion, the choice between Chevron and Devon Energy depends on your investment goals and risk tolerance. If you prefer a more stable, diversified company with a consistent dividend growth track record, Chevron may be the better choice. However, if you are willing to accept the risk of dividend cuts in exchange for potentially higher dividends during good times, Devon Energy could be an attractive option. Ultimately, understanding the key differences between these two companies will help you make a more informed investment decision.