Earnings

Critical Comparison: Marathon Oil Corporation (MRO) vs. PDC Energy, Inc. (PDCE)

Marathon Oil Corporation (NYSE:MRO) and PDC Energy, Inc. (NASDAQ:PDCE) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Marathon Oil Corporation (MRO) has an EBITDA margin of 40.66%, compared to an EBITDA margin of 74.46% for PDC Energy, Inc. (PDCE). This suggests that PDCE underlying business is more profitable. MRO’s ROI is -7.30% while PDCE has a ROI of -5.00%. The interpretation is that PDCE’s business generates a higher return on investment than MRO’s.

Cash Flow 



The amount of free cash flow available to investors is ultimately what determines the value of a stock. MRO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.13. Comparatively, PDCE’s free cash flow per share was -1.25. On a percent-of-sales basis, MRO’s free cash flow was -2.74% while PDCE converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, PDCE is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. MRO has a current ratio of 2.10 compared to 1.20 for PDCE. This means that MRO can more easily cover its most immediate liabilities over the next twelve months. MRO’s debt-to-equity ratio is 0.59 versus a D/E of 0.39 for PDCE. MRO is therefore the more solvent of the two companies, and has lower financial risk.




Valuation

MRO trades at a forward P/B of 0.75, and a P/S of 2.03, compared to a forward P/E of 70.48, a P/B of 0.93, and a P/S of 3.01 for PDCE. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. MRO is currently priced at a -32.66% to its one-year price target of $16.32. Comparatively, PDCE is -36.66% relative to its price target of $60.64. This suggests that PDCE is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for MRO and 2.10 for PDCE, which implies that analysts are more bullish on the outlook for MRO.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. MRO has a beta of 2.30 and PDCE’s beta is 0.90. PDCE’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. MRO has a short ratio of 2.75 compared to a short interest of 4.58 for PDCE. This implies that the market is currently less bearish on the outlook for MRO.

Summary

PDC Energy, Inc. (NASDAQ:PDCE) beats Marathon Oil Corporation (NYSE:MRO) on a total of 7 of the 12 factors compared between the two stocks. PDCE has higher cash flow per share, generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. PDCE is more undervalued relative to its price target. Finally, SN has better sentiment signals based on short interest.

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