Better Buy: Suncor Stock or Occidental Petroleum Stock?

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Suncor Energy (TSX:SU) and Occidental Petroleum (NYSE:OXY) are two stocks that are similar in many ways. Both are exploration and production (E&P) oil stocks. Both have been owned by Warren Buffett. Both have market caps between $40 billion and $60 billion, making them similar in size.

And Suncor Energy and Occidental Petroleum have both been pretty good investments over the last 12 months. In that period, SU has risen 5.7%, and OXY has risen 9%. Clearly, both of these oil stocks have outperformed the S&P 500 over the last 12 months. But between the two of them, which is the better buy?

The case for Suncor

The case for Suncor Energy comes down to diversification and valuation.

Compared to Occidental Petroleum, Suncor has far more business activities. As a fully integrated energy company, it’s involved in selling crude oil, refining, operating gas stations, and midstream. OXY is only involved in selling crude and midstream – and its midstream business is very small as a percentage of the total. It only makes up about 16% of the company’s earnings.

Because Suncor is involved in so many more oil and gas industry segments than OXY is, it can profit in a wider variety of different environments. For example, SU has the potential to do well in refining even when oil prices are low. The refining industry’s profit comes from the spread between oil prices and refined product prices, not the oil price in itself. So, Suncor could possibly remain profitable even if the price of oil went down dramatically. That’s less likely to be the case for OXY.

Also, Suncor is a fair bit cheaper than OXY at today’s prices. SU trades for 5.2 times earnings, 1.1 times sales, and 1.5 times book value. OXY, on the other hand, trades for 7 times earnings, 1.7 times sales, and 3 times book value. So, Suncor is clearly the cheaper stock.

The case for Occidental Petroleum

The case for Occidental Petroleum comes down to its ability to profit off of high oil prices. If oil prices rise, then OXY will reap more profit off it than Suncor will. Occidental Petroleum is nearly a pure play exploration and production company that sells oil wholesale. This business makes more money in periods when oil prices are high than when they’re low. Today, many people think that oil prices will rise, because OPEC (a major oil cartel) is cutting output. That reduces the supply of oil while demand will presumably stay near-constant, so it should benefit OXY. Higher oil prices will benefit Suncor as well, though maybe not to the same extent, because Suncor also has refining operations, which respond to oil price moves in less intuitive ways.

The winner is…

Having looked at all relevant factors, I consider Suncor Energy stock to be a slightly better buy than Occidental Petroleum stock at today’s prices. They are both pretty good companies but Suncor is a little cheaper right now. Of course, if oil prices rally, Occidental Petroleum will likely rally more than Suncor will. But both will do well.

The post Better Buy: Suncor Stock or Occidental Petroleum Stock? appeared first on The Motley Fool Canada.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.