Better Oil Stock: Devon Energy vs. ExxonMobil

Over the past three months, West Texas Intermediate crude prices have spiked around 15% only to turn around and come back down to a roughly 4% gain. There are supply-and-demand and geopolitical reasons for the price move, but the truth is that this type of volatility isn’t uncommon in the energy sector.

Here’s why that could make ExxonMobil (XOM 1.00%) the better oil stock for you, or it could make Devon Energy (DVN 2.24%) the oil stock you might want to pick. Here’s why.

The basics: Exxon vs. Devon

Devon Energy is what is known as an upstream company, which means it produces oil and natural gas. It also focuses its business geographically, by only drilling for energy in the U.S. market. The stock can be highly volatile given that oil and gas prices are the main driver of its financial results on the top and bottom lines. There are simply no other divisions to help offset the ups and downs of its drilling operations.

ExxonMobil operates in the upstream, too. And oil and natural gas prices will have a material impact on its financial performance as well. However, Exxon also operates in the midstream and the downstream areas.

The midstream is comprised of energy transportation assets like pipelines. This vital energy infrastructure tends to produce reliable cash flows through the energy cycle. The downstream is made up of chemical and refining operations. These businesses can be just as volatile as the upstream, but often in a counter cyclical way since oil and natural gas are key inputs to these operations.

While Exxon’s results will vary along with energy prices, the peaks and valleys tend to be less extreme than they would be for a pure-play producer like Devon Energy. That’s the benefit provided by Exxon’s diversification across the entire energy sector.

Which is the better oil stock?

The truth is that there is nothing inherently wrong with either Exxon or Devon. But they aren’t going to be appropriate for the same kinds of investors. Exxon, perhaps obviously, will be more appealing to conservative types. That’s a function of its diversified business model but there’s more to like than just that.

For starters, Exxon’s dividend has been increased annually for an impressive 42 years and counting. Even if you aren’t a dividend-focused investor, that speaks to the resilience of the business. And if you are a dividend lover, it suggests that you can buy Exxon and comfortably collect your quarterly checks for years to come. The dividend yield, meanwhile, is 3.5%. That’s well above the market’s 1.2% yield, but not exactly a huge yield for Exxon historically speaking.

XOM data by YCharts

If you are looking to add energy exposure to your income portfolio right now, it is probably still worth buying. That’s particularly true given that its balance sheet is among the strongest in the integrated energy peer group. Basically, it is prepared to deal with the next energy downturn when it eventually arrives. If you have a value bias or prefer higher yields, however, you might want to wait for that downturn. It will be hard to buy while Exxon’s business is struggling, but that is, historically speaking, the best time to jump aboard.

Devon Energy isn’t likely to appeal to conservative investors and its 3.3% yield is lower than Exxon’s yield so it probably won’t attract income investors, either. So who would prefer Devon over Exxon? Investors who have a strong feeling about energy prices. That ventures into market timing, which is a very difficult thing to do successfully over the long term.

However, Devon is a well-respected company, has a low breakeven point, and has a large inventory of land on which to drill in the future. So this is hardly a throw-caution-to-the-wind type of investment. In fact, Devon Energy has consistently paid dividends for many years. It couldn’t have done that without being a well-run company. 

That said, in recent years Devon has paid a variable dividend driven by its financial results. Spiking energy prices following the coronavirus pandemic period fueled those extra dividends. Those extra dividends have dried up thanks to normalizing energy prices and Devon’s acquisition-driven growth efforts (it is paying down debt instead of paying dividends, which is a good capital allocation decision).

While the financial results and the stock price are always going to be volatile, Devon Energy is still growing its business despite operating in the shadows of giants like Exxon. While only more aggressive investors will want to look at Devon, it is overall a fairly well-run energy company.

Exxon or Devon? It depends.

There are very few easy answers when it comes to investing, and the choice between Exxon and Devon is no different. A deep energy downturn would lead to more attractive prices for each of these energy stocks, of course, so figuring out which one you like most now may let you prepare to buy when everyone else is selling.

That said, Exxon will be most appropriate for conservative investors looking for broad energy industry exposure while Devon is a better fit for aggressive investors who have a constructive view of energy prices.