Like Occidental Petroleum? You should check out this oil stock.

Occidental Petroleum (OXY 2.24%) is one of the most popular oil stocks these days. Warren Buffett probably has something to do with it. his company, Berkshire Hathawayowns over 27% of its outstanding stock.

One of the factors that likely attracted Buffett to Occidental Petroleum is its prime position in the Permian Basin. However, it is not the only one oil stock with a foothold in that world-class oil field. Diamondback Energy (FANG 1.05%) it’s 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 approximately 2.8 million net acres of land. It recently strengthened its position with the $12 billion acquisition of CrownRock. The deal added more than 94,000 net acres with approximately 1,700 undeveloped low-cost drilling locations. This increased Occidental’s inventory of breakeven locations below $40 per barrel by 33%.

However, the Permian is only part of Occidental’s business. It is 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 build a low-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 the best depth and quality of inventory with approximately 6,100 future drilling locations with profitability levels below $40 per barrel. The company expects the deal to increase its free cash flow per share by about 10% next year.

Different free cash flow he concentrates

Occidental and Diamondback Energy generate plenty 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 debts while also assuming $1.2 billion of existing debt. The short-term focus is now on using excess free cash flow to pay down debt. The company aims to reduce debt by $4.5 billion within a year of closing this deal a combination of free cash flow and asset sales. He already did has made excellent progress on this goal as it halted share buybacks to retain more cash for debt reduction.

Occidental may resume share buybacks in the future once it reaches its target debt level of less than $15 billion. However, its ability to buy back shares has some limitations because it has to buy back Berkshire Hathaway’s stock. preferred stock investment from the 2019 acquisition of Anadarko Petroleum once its return on capital reaches a certain level.

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

Its short-term goal is to reduce net debt to $10 billion shortly after the deal closes through a combination of free cash flow and asset sales. In the longer termhe wants to get his net debt to a range of $6 billion to $8 billion. The company believes it can achieve this goal in the next few yearsolely by allocating 50% of its free cash flow to debt service.

Diamondback Energy plans to return the other 50% to shareholders through a combination of basic dividend, share buybacks and variable dividends. So while Occidental is at present by limiting its cash returns to dividends, Diamondback sends investors half of its free cash flow. In the second quarter, the company paid its basic dividend of $0.90 per share and sent investors an additional $1.44 per share through its variable dividend. While it hasn’t made any buybacks because of the pending Endeavor deal, it has about $1.6 billion left on its current authorization.

An excellent alternative to Occidental

Occidental Petroleum is an excellent oil company, which is why Warren Buffett became its largest shareholder. However, it is not the only one great oil stock there. Diamondback Energy has some desirable characteristics, including a focus on the Permian and bigger the ability to return cash to shareholders. These characteristics make it worth a closer look for those looking for ways to profit from the oil industry.