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Even though oil stocks have been abandoned by many investors, they remain favorites for Warren Buffett. Among these, oil giants Chevron (NYSE: CVX) and Occidental Petroleum (NYSE: OXY) rank as the 5th and 6th holdings in Berkshire Hathaway’s portfolio, together accounting for nearly 10% of its total investments. This indicates a deep bond between Buffett and the oil sector.
Amid a global consensus on the development of clean energy, the trend of traditional oil being replaced by new energy sources is clear. Nonetheless, Buffett continues to invest heavily in traditional energy companies. His rationale is based on a positive outlook for long-term oil prices and sustained confidence in the future of the oil industry.
However, if you have to choose between these two Buffett oil stocks, which one is the better option?
Chevron’s current enterprise value is close to $320 billion, making it the largest oil company in the United States. In contrast, Occidental Petroleum’s enterprise value is just over $80 billion. Additionally, Chevron’s production is significantly higher, with a Q1 output of 3.35 million barrels of oil equivalent per day (boepd) compared to Occidental’s 1.17 million boepd. Chevron’s business operations are also more diversified.
Last year, Occidental agreed on a $12 billion acquisition of CrownRock, further solidifying its position in the Permian Basin. This acquisition will increase the company’s production by 170,000 boepd and is projected to boost annual free cash flow by $1 billion, assuming an oil price average of $70 per barrel (currently around $80). As long as oil prices remain favorable, the CrownRock acquisition and oil and gas investments will continue to drive the company’s profitability in traditional oil operations over the next several years. Furthermore, Occidental is investing in its chemical business and developing a leading carbon capture and storage (CCS) platform. These investments are expected to increase the company’s non-oil earnings by over $1 billion by 2026.
Chevron is also active in the acquisition space, currently pursuing a nearly $60 billion acquisition of Hess Corp (NYSE: HES). This acquisition will boost future production and free cash flow. Additionally, the company is investing heavily in traditional energy businesses and low-carbon energy platforms, including carbon capture, hydrogen, and biofuels. Excluding Hess, Chevron’s free cash flow is expected to grow by more than 10% annually until 2027 and could potentially double with the acquisition, assuming an average oil price of around $70 per barrel.
Chevron’s larger scale and diversified business model result in lower risks. Its fortress-like balance sheet further reduces the company’s risk profile. At the end of Q1, Chevron had $6.3 billion in cash and equivalents and $21.8 billion in debt, with a leverage ratio of 12% (8.8% when adjusted for cash), significantly lower than its long-term target range of 20%-25%. The $60 billion Hess acquisition is being conducted through an all-stock transaction. Moreover, even if oil prices decline, Chevron has the capacity to raise dividends and repurchase shares.
In comparison, Occidental Petroleum has $18.5 billion in debt and $1.2 billion in cash, with debt levels above its long-term target of under $15 billion. To complete the CrownRock acquisition, the company plans to issue $9.1 billion in new bonds while taking on CrownRock’s $1.2 billion existing debt. To reduce debt and maintain an investment-grade credit rating, Occidental plans to sell $4.5-$6 billion in assets after the transaction is completed.
Although both Chevron and Occidental Petroleum are among Buffett’s favored long-term holdings, Chevron entails lower risk due to its larger scale, diversified operations, and stronger balance sheet.
