Oil is a volatile commodity, a fact to consider when buying oil-related stocks. However, there are different ways of looking at this fact from an investment perspective. Chevron (NYSE: CVX), Devon energy (NYSE: DVN)and TotalEnergies (NYSE: TTE) offer three very different ways to dip your toes into oil stocks if you have $200 or more to work with. Here’s a quick overview of each.
Chevron is what is known as an integrated energy company. This means that it invests in the upstream (oil and natural gas production), middle (oil pipeline) and downstream (chemical and refinery) segments of the wider energy industry. This diversification helps to even out earnings in a highly volatile sector as each segment of the industry operates just a little differently. For example, when oil prices are low and upstream operations suffer, downstream operations will benefit from low input costs.
While Chevron’s diversification into the energy sector does not mitigate the impact that oil price swings have on the top and bottom lines, it does moderate those changes. That, along with the company’s focus on strong balance sheetthey helped it survive through industry downturns while continuing to reward investors with dividend increases. Chevron’s dividend has increased annually for 37 consecutive years, which is pretty amazing given the wild swings in oil prices that have occurred during that period. If you want a reliable, high-yielding energy stock (Chevron’s yield is 4% today), Chevron is probably one of the best options.
While Chevron is focused on consistency, Devon Energy offers the exact opposite. This company is focused on the US upstream sector, producing oil and natural gas in key domestic energy basins. Without other businesses to offset the inherent volatility of selling these commodities, Devon’s top and bottom lines are highly volatile. This in turn leads to dramatic rises and falls in stocks, moving in tandem with large swings in energy prices. While it’s not a good idea to try to time the markets, if you have a constructive view on oil prices, Devon Energy is likely to lead to more upside than investing in Chevron. In addition, remember that there is also a higher downside risk.
While these big-picture dynamics are likely to be the driving force behind investing in Devon Energy, there are other factors worth mentioning. Devon Energy is a respected company that operates in multiple regions of the United States. It has an investment-grade balance sheet, 10+ years of drilling inventory and a low break-even point, so it can make money even if oil prices are a little low. So buying Devon Energy is not throwing caution to the wind. It’s more like an educated bet on higher energy prices that probably won’t go to zero if you’re wrong.
