Like Occidental Petroleum? You Should Check Out This Oil Stock.

Occidental Petroleum (NYSE: OXY) is one of the more popular oil stocks these days. Warren Buffett likely has something to do with that. His company, Berkshire Hathaway, owns over 27% of its outstanding stock.

One of the factors that has probably drawn Buffett to Occidental Petroleum is its premier position in the Permian Basin. However, it's not the only oil stock with a foothold in that world-class oil field. Diamondback Energy (NASDAQ: FANG) is a leader in the region, and those who like Occidental should check it out.

A pure play on the Permian

Occidental Petroleum is one of the largest producers in the Permian Basin, where it controls about 2.8 million net acres of land. It recently strengthened its position through its $12 billion acquisition of CrownRock. The deal added over 94,000 net acres with about 1,700 undeveloped low-cost drilling locations. That boosted Occidental's inventory of sub-$40-per-barrel breakeven locations by 33%.

However, the Permian is only a part of Occidental's business. It's also a leading producer in the DJ Basin and Gulf of Mexico. In addition, Occidental has international operations, a chemicals business, and a midstream platform, and it is building a lower-carbon energy business. Those operations add diversification.

Diamondback Energy, on the other hand, is a pure play on the Permian Basin. The company now controls about 828,000 net acres in the region after buying rival Endeavor Energy Resources in a $26 billion deal earlier this year. The company has best-in-class inventory depth and quality, with about 6,100 future drilling locations with breakeven levels below $40 a barrel. The company expects the deal to boost its free cash flow per share by around 10% next year.

Differing free cash flow focuses

Occidental and Diamondback Energy both generate a lot of free cash flow. However, they allocate that cash differently.

Occidental funded most of its CrownRock deal with new debt, issuing $9.1 billion of new debt while also assuming $1.2 billion of its existing debt. Now its near-term focus is on using its excess free cash flow to repay debt. The company aims to reduce debt by $4.5 billion within a year of closing that deal through a combination of free cash flow and asset sales. It has already made excellent progress on that target because it has paused share repurchases to retain more cash for debt reduction.

Occidental could restart share repurchases in the future once it achieves its targeted debt level of less than $15 billion. However, its capacity to repurchase shares has some limitations because it needs to buy back Berkshire Hathaway's preferred stock investment from its 2019 Anadarko Petroleum acquisition once its capital returns reach a certain level.

Diamondback Energy also took on some debt to close its megadeal for Endeavour. It paid $8 billion in cash, funded through a combination of cash on hand, its credit facility, and new debt. However, it started from a stronger financial position with just $5.3 billion of net debt before closing the deal.

Its near-term goal is to get net debt down to $10 billion shortly after closing the transaction through a combination of free cash flow and asset sales. Longer term, it wants to get its net debt to a range of $6 billion to $8 billion. The company believes it can achieve that goal within the next few years solely by allocating 50% of its free cash flow toward paying down debt.

Diamondback Energy intends to return the other 50% to shareholders through a combination of its base dividend, share repurchases, and variable dividends. So while Occidental is currently limiting its cash returns to its dividend, Diamondback is sending half its free cash flow to investors. In the second quarter, the company paid its base dividend of $0.90 per share and sent investors an additional $1.44 per share through its variable dividend. While it didn't make any repurchases because of the pending Endeavor deal, it has about $1.6 billion remaining on its current authorization.

A great alternative to Occidental

Occidental Petroleum is an excellent oil company, which is why Warren Buffett has become its leading shareholder. However, it's not the only great oil stock out there. Diamondback Energy has some desirable characteristics, including its focus on the Permian and greater ability to return cash to shareholders. Those features make it worth a closer look for those seeking ways to cash in on the oil industry.

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Matt DiLallo has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.