In the oil and gas industry, Exxon Mobil (XOM) reigns supreme. It is the largest publicly-traded oil company in the world, with a market capitalization of $340 billion.
That said, one of its much smaller competitors-Occidental Petroleum (OXY) is a better investment today.
Exxon Mobil is a Dividend Aristocrat, a list of stocks in the S&P 500, that have raised their dividends for at least 25 consecutive years.
Occidental has not increased its dividend for as long as Exxon Mobil, but it has increased its own dividend for 15 years in a row.
This makes it a Dividend Achiever, a list of 271 stocks that have raised their dividends for at least 10 consecutive years.
You can see the full Dividend Achievers List here.
This article will discuss three reasons why Occidental Petroleum is a better oil and gas dividend stock than Exxon Mobil right now.
Reason #1: Growth Prospects
Occidental has a market capitalization of $48 billion. In the energy sector, it is very much David to Exxon Mobil's Goliath.
But therein lies its advantage. Occidental has proven to be a nimbler company than Exxon Mobil, due to its ability to more aggressively increasing its production.
The first advantage that Occidental has over Exxon Mobil is that it is growing oil and gas production at a much higher rate.
Exxon Mobil's U.S. upstream unit posted a $4.2 billion net loss in 2016.
Source: 4Q Earnings Presentation, page 21
The massive net loss was mostly because of a $2 billion reserve impairment charge, related to oil and gas properties in the Rocky Mountains.
Even excluding the $2 billion impairment, Exxon Mobil's U.S. upstream segment still lost $2.1 billion in 2016, almost double the loss posted the year before.
Overall, Exxon Mobil's earnings-per-share declined 51% in 2016.
One reason for the poor performance in Exxon Mobil's upstream segment is that total production fell by 3% in the fourth quarter.
Meanwhile, Occidental's production increased 7% last year.
The biggest increase came from Occidental's crown jewel-its Permian Basin resources. Permian production jumped 13% last year.
Source: Q4 Earnings Presentation, page 11
The Permian Basin is one of the premier oil fields in the U.S., because of its massive resource potential, and its favorable economics.
Occidental achieved a 25% reduction in Permian unit operating costs last year, which drove a 22% increase in capital efficiency in the region.
Exxon Mobil is the industry giant, but this makes it very difficult to change direction. Occidental is much more financially flexible.
Last year, Occidental cut capital expenditures by 49%, while Exxon Mobil reduced capital spending by 38% in 2016.
Source: Q4 Earnings Presentation, page 12
This helped Occidental's financial performance improve dramatically in 2016. The company's net loss shrank from $7.8 billion in 2015, to $574 million last year.
Going forward, Occidental could continue to outperform Exxon Mobil. Occidental's long-term forecast is for 5%-8% annual production growth.
If oil prices continue to recover in 2017, Occidental is set up perfectly to ride the wave of higher commodity prices.
Reason #2: Exposure to Rising Oil Prices
Exxon Mobil is an integrated major. Along with its large upstream business, it has a significant downstream business.
Slightly more than half of Exxon Mobil's 2016 profits were generated by the downstream refining segment.
This served the company well when oil prices were crashing. Earnings in Exxon Mobil's downstream unit more than doubled in 2015, to $6.6 billion.
It seems counterintuitive, but refining profits actually grow when oil prices decline, as they did in 2015.
That is because volatile swings in oil prices widens refining spreads by lowering feedstock costs. This means, once oil prices start to gradually rise again, refining performs much worse.
As a result, earnings in Exxon Mobil's downstream segment fell 36% in 2016, to $4.2 billion.
Source: 4Q Earnings Presentation, page 23
By contrast, Occidental does not have a refining operation. Instead, oil and gas production represent 63% of its annual revenue.
Specifically, the Permian Basin accounts for the bulk of its domestic capital spending for 2017.
Source: Q4 Earnings Presentation, page 16
If oil prices continue to rise, Occidental's greater exposure to upstream activities could provide it with a stronger tailwind than what Exxon Mobil might see in 2017.
Exxon Mobil has several large growth projects in its future, but some of its biggest projects won't be completed for several years.
For example, one of the company's most important development is the Liza field, where oil was first discovered in 2015.
Source: 2017 Analyst Meeting Presentation, page 35
The major advantage of Occidental's more aggressive production, is that it could position the company to benefit more from rising oil prices moving forward.
Reason #3: Higher Dividend Yield
Lastly, Occidental stock is more appealing than Exxon Mobil shares, because it has a much higher dividend yield.
Occidental currently pays $3.04 per share in dividends. The current dividend yield of the stock is 4.8%.
To compare, Exxon Mobil has a 3.7% dividend yield.
The reason for this is that Exxon Mobil stock has fared better recently, now that oil prices have fallen back below $50 per barrel.
For example, in the past six months, Occidental shares have lost 12% of their value, while Exxon Mobil stock has declined just 2% in that time.
The difference in dividend yield is significant: Occidental stock provides approximately 30% more dividend income than Exxon Mobil each year, based on their current yields.
Exxon Mobil has a longer history of annual dividend increases than Occidental.
But Occidental could offer higher dividend growth going forward, if its revenue and earnings growth exceeds Exxon Mobil's.
There is no doubting that Exxon Mobil is a high-quality company. It has an excellent balance sheet, and the company has increased its dividend for 34 years in a row.
Exxon Mobil remains a blue-chip stock with a rock-solid dividend payout. It is a worthwhile holding for long-term investors, and is a good bet for slow-and-steady returns.
But, due to its stronger growth prospects and significantly higher dividend yield, Occidental offers more attractive total return potential.