Stock Analysis & Ideas

XOM vs. OXY: Why Smart Money Prefers OXY Stock

Story Highlights

The energy sector has had a tremendous year amid soaring oil and natural gas prices, but some energy stocks continue to hold up well despite the plunging commodity prices. While energy certainly looks like an excellent place to be right now, Occidental Petroleum looks slightly better than Exxon Mobil in the near term.

The energy market is cooling down as oil and natural gas prices tumble, but despite those falling prices, energy stocks have held up rather well. In this piece, we compared two energy stocks, XOM and OXY, to see which is better. This is a critical time for oil and gas majors because commodity prices could be at a crossroads. Exxon Mobil (NYSE:XOM) and Occidental Petroleum (NYSE:OXY) have soared in the past year, benefiting from the energy sector’s extreme outperformance, but hedge funds prefer OXY stock. Recently, funds unloaded 2.4 million shares of Exxon while snapping up 29.2 million shares of Occidental over the last three months.

Exxon Mobil (XOM)

Exxon Mobil was once the world’s highest-valued company by market capitalization, although it has since fallen behind tech giants like Apple (NASDAQ:AAPL). The company is trading at a trailing P/E multiple of around 8.4x, in line with the current industry average. For that reason, a neutral rating appears appropriate for Exxon in general, although dividend-focused investors may wish to hold the shares due to its attractive dividend yield of 3.5%.

The most important factor for Exxon and Occidental alike is falling oil and natural gas prices. This year’s ultra-high prices have pushed both companies’ revenues and profits through the roof. However, even though oil and gas prices have dropped significantly, both companies have retained nearly all of the year’s gains.

In fact, Exxon shares have soared to a new record high this year, and the company is on track for a record full-year profit this year. The company’s robust profits enabled it to pay back the $21 billion it borrowed in 2020 – when it lost money due to weak demand caused by the work-at-home trends and other pandemic-era issues.

Exxon has held up better than Occidental, with less volatility, which makes it a solid dividend play. However, any additional upside appears limited in the near term, even if or when oil and gas prices rebound. Unfortunately, Exxon’s production leaves much to be desired. In June, the oil giant was producing 3.7 million barrels of oil and gas equivalent per day, in line with last year but an almost 9% decline from its average of 4.1 million barrels of oil equivalent per day a few years back.

What is the Price Target for XOM Stock?

Exxon Mobil has a Moderate Buy consensus rating based on seven Buys, five Holds, and zero Sell ratings assigned over the last three months. At $118.83, the average price target for Exxon Mobil implies upside potential of 13.3%.

Occidental Petroleum (OXY)

Occidental enjoys many of the same benefits as Exxon regarding high commodity prices and robust revenue and profits. However, it enjoys an additional benefit, which is the growing speculation that Warren Buffett may keep buying shares. Additionally, with a P/E multiple of about 5.3x, Occidental Petroleum looks cheap compared to Exxon Mobil, making a bullish view appear appropriate.

One of the more interesting points about Occidental right now is the possibility that Buffett might want to buy it out, although there are reasons to downplay those speculations. Berkshire Hathaway received regulatory approval to acquire up to a 50% stake in the company in August, although as of the third quarter, it held a 21% stake in shares (30% if you include warrants).

Berkshire has been grabbing Occidental shares in the $50 to low $60 range, so at $65, they could be pushing the edge of what Buffett is willing to pay. Additionally, the price tag to buy the rest of Occidental would be significantly more expensive than his current record acquisition of $44 billion for BNSF Railway in 2009. However, many have noted that Berkshire’s buying activity in Occidental resembles the patterns seen before other acquisitions.

What is the Price Target for OXY Stock?

Occidental Petroleum has a Hold consensus rating based on four Buys, eight Holds, and one Sell rating assigned over the last three months. At $75.15, the average price target for Occidental Petroleum implies upside potential of 18.4%.

Conclusion: Neutral on XOM, Bullish on OXY

At the end of the day, there is plenty to like about both Exxon Mobil and Occidental Petroleum. Both have robust balance sheets and free cash flow from the last 12 months. However, it’s easy to see why hedge funds overwhelmingly prefer Occidental.

Occidental appears to have more upside potential than Exxon right now, although it also looks riskier partly due to its higher volatility. Exxon’s dividend yield is also far more attractive than Occidental’s, so investors looking purely for dividend plays will prefer Exxon. However, Occidental may have more near-term upside for the average investor.

Disclosure

Tired of arriving late to the Big Returns Party?​
Most investors don’t have major gainers like TSLA or NVDA on their radar from the start.
The profusion of opinions on social media and financial blogs makes it impossible to distinguish between real growth potential and pure hype.
​​For the past decade, we have developed and perfected technology designed to help private investors, just like you, find the best opportunities, with the greatest upside potential, in any financial climate.​
Learn More