Devon Energy vs. Chevron: Here's the Better Oil Stock to Own Right Now
Key Points
Devon Energy's business is leveraged to rising energy prices, which will attract short-term investors.
Chevron's more diversified business has rewarded investors with decades of annual dividend increases.
- 10 stocks we like better than Devon Energy ›
The geopolitical conflict in the Middle East is headline-grabbing news. The energy market disruption caused by this event has pushed oil prices materially higher. That's good news for energy companies, but investors need to step back and make an honest assessment of their goals before buying an energy stock.
Here's why Devon Energy (NYSE: DVN) could be a better energy stock to own right now. And why long-term investors may actually prefer Chevron (NYSE: CVX).
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Focused on the upstream
Devon Energy produces oil and natural gas, which places it squarely in the upstream segment of the broader energy sector. The company's top and bottom lines are driven by energy prices, which is a good thing right now, given the rise in commodity prices following the start of the Middle East conflict. However, Devon is a U.S. energy producer, so its operations aren't directly impacted by the conflict.
Devon is a solid option for investors looking to lean into rising energy prices. The company recently explained just how beneficial higher oil prices will be. At $90 a barrel for West Texas Intermediate (WTI), the key U.S. oil benchmark, the company's free cash flow yield should be around 15%. At $100 oil that rises to 18%, with $110 oil pushing the free cash flow yield up to 21%.
Stepping back, a 22% increase in oil prices will lead to a 40% increase in Devon's free cash flow yield. You can see why investors looking to play the rise in oil prices might like this upstream stock.
Oil prices will eventually fall
The problem is that oil prices have a long history of being volatile, rising and falling in dramatic fashion. As newsworthy as the current geopolitical conflict is, the energy price volatility it is causing isn't unusual at all. If you are a long-term investor, you might not want to lean into a stock that is levered to rising oil prices, as is Devon Energy. A better choice might be an energy industry giant like Chevron.
Chevron offers an attractive 3.8% dividend yield, backed by decades of annual dividend increases. It has a strong balance sheet (the debt-to-equity ratio is only 0.25x) and a business diversified across the entire energy value chain. It is built to survive through the entire energy cycle while continuing to reward investors with reliable dividends.
While Devon may have more upside potential if oil prices rise, Chevron's business is likely to hold up better when oil prices eventually fall. So, right now, Devon is probably the best option. However, if you think in decades when you invest, Chevron should probably be the stock you go with.
Should you buy stock in Devon Energy right now?
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
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