Leo Sun, The Motley Fool
5 min read
In This Article:
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Occidental’s stock has plummeted with crude oil prices.
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Energy Transfer’s shares rallied as more investors embraced its “toll road” pipelines.
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Energy Transfer’s stability, higher yield, and lower valuation all make it a better buy.
Occidental Petroleum (NYSE: OXY) and Energy Transfer (NYSE: ET) are popular income stocks for energy-focused investors. Occidental, also known as Oxy, is a leading oil and gas producer. Energy Transfer is a major midstream pipeline operator.
Occidental pays a forward yield of 2.4%. It cut its dividend during the pandemic in 2020 and kept it unchanged in 2021, but it's raised its payout annually over the following four years. Energy Transfer pays a higher forward yield of 8.3%, and it has raised its distributions for 12 consecutive years.
Over the past three years, Oxy's stock declined 40% as Energy Transfer's stock rallied over 40%. Let's see why Energy Transfer outperformed Oxy -- and if it's still the better buy today.
Oxy and Energy Transfer operate different business models.
Oxy is primarily an upstream company that engages in the exploration, drilling, and extraction of oil and natural gas. When oil and gas prices rise, its revenue growth outpaces its spending and its margins expand. But when those prices decline, its revenue growth slows down and its margins contract.
Energy Transfer is a midstream company that only provides pipeline, storage, and terminal services for natural gas, crude oil, and other refined products. It operates over 125,000 miles of pipelines across 44 states, and it runs a "toll road" business by charging upstream and downstream companies to use its infrastructure.
Therefore, Energy Transfer doesn't need to worry about volatile oil and gas prices; it keeps generating stable revenue and profits as long as its pipelines are up and running.
Over the past three years, the spot price of West Texas Intermediate (WTI) crude oil has declined about 46%. That drop was caused by inflation and high interest rates (which cooled the global economy and the market's demand for oil), and a decision by OPEC+ to boost its output. The rising U.S. dollar exacerbated that pressure.
That oil market's slowdown crushed Oxy's stock, but it barely affected Energy Transfer. Moreover, Oxy's dividend cut in 2020 made it a lot less attractive to income investors, especially as rising interest rates significantly boosted the yields of risk-free CDs and T-bills. Meanwhile, Energy Transfer's higher distribution still made it an attractive income investment.
