Occidental Petroleum (OXY 0.95%) and Diamondback Energy (FANG 0.27%) are two of the leading producers in the prolific Permian Basin that runs through parts of Texas and New Mexico. That basin has almost single-handedly turned America into an oil-producing powerhouse. Given the significant resources still in that basin, the country could remain a leading oil producer for many years.
The Permian Basin should fuel growth for these two leading energy stocks for years to come. Here's a closer look at which is the best one to buy right now.
Drilling down into these leading oil stocks
Diamondback Energy is the leading pure-play producer in the Permian. The company has amassed a large-scale position with 870,000 net acres via a series of acquisitions. The biggest was its $26 billion transformational merger with Endeavor Energy Resources, which closed in September. The combined company should produce over 816,000 barrels of oil equivalent (BOE) per day. Diamondback now has over 6,100 total drilling locations remaining at a break-even level of less than $40 a barrel.
Occidental Petroleum has an even larger position in the Permian at 2.9 million acres that produce 729,000 BOE/d. About 1.4 million of those acres are conventional oil fields that produce oil and gas by drilling vertical wells (instead of horizontally drilled wells) and enhanced oil recovery techniques (like injecting carbon dioxide). The company recently bolstered its unconventional position by acquiring CrownRock in a $12 billion deal. That acquisition increased its production by 170,000 BOE/d and added 1,700 future drilling locations with a break-even level below $40 a barrel, increasing Occidental's inventory by 33%.
On top of the Permian, Occidental has positions in the Rockies (DJ and Powder River basins), U.S. Gulf of Mexico, and international operations in Algeria, Oman, and the UAE. The energy company also has midstream operations (including a stake in MLP Western Midstream Partners), a petrochemicals unit (OxyChem), and a lower carbon energy platform (primarily carbon capture and storage).
Analyzing their financial profiles
Diamondback Energy has a solid financial profile despite its acquisition-fueled growth over the years. It ended the third quarter with $12.7 billion of net debt following the Endeavor deal. That's a relatively low level for a company of its now larger scale, which led two credit rating agencies to recently upgrade their credit ratings for the oil company further into investment-grade territory.
The company wants to strengthen its financial profile further over the coming years. Its near-term goal is to get its net debt below $10 billion by retaining 50% of its excess free cash and selling noncore assets. In the long term, it aims to get its debt to around $6 billion to $8 billion, which it expects to achieve by retaining half of its excess free cash flow.
Diamondback Energy plans to return the other half of its free cash flow to investors. It intends to continue growing its dividend (it has delivered industry-leading dividend growth of 8% per quarter on average since initiating the payout in 2018). Diamondback also plans to repurchase shares (it recently approved another $2 billion increase in its authorization to $6 billion ($3.1 billion of which it has utilized). Meanwhile, it will pay a variable dividend if it has additional excess cash to return to investors.
Occidental isn't quite as financially strong due to its massive debt-funded acquisition of Anadarko Petroleum in 2019. It also primarily financed its CrownRock deal with debt. As a result, the company ended the third quarter with over $25 billion in debt. Its near-term aim is to reduce debt by $4.5 billion to ensure it maintains its investment-grade credit rating. It achieved 90% of that target during the third quarter via asset sales and retained free cash flow. Its longer-term target is to reduce debt to $15 billion, which it aims to achieve via noncore asset sales and retained free cash flow.
Given Occidental's higher debt level, the company is currently retaining all its free cash flow after paying its dividend to reduce debt. That will continue until it gets debt below $15 billion. Once it hits that level, the company will resume share repurchases and redeem the preferred equity investment Warren Buffett's Berkshire Hathaway made in 2019 to help fund the Anadarko deal.
Two ways to play the Permian
Diamondback Energy and Occidental Petroleum are leading producers in the Permian. However, they're very different companies. Diamondback is a pure play on that region. Meanwhile, thanks to its stronger financial profile, it's returning half of its free cash flow to investors via a rapidly growing dividend and meaningful share repurchase program.
On the other hand, Occidental is a much more diversified energy company. However, it has a weaker financial profile due to its debt-funded acquisitions. That's impacting its ability to return additional cash to investors above its dividend.
Given the volatile oil market, the financially stronger Diamondback looks like the better buy between the two. It could have the fuel to grow shareholder value faster in the future as it repays debt and repurchases stock, the latter of which Occidental can't afford to do until it gets its debt to a much lower level.
