Occidental Petroleum Corporation (NYSE:OXY) shares are down more than -5.35% this year and recently decreased -0.21% or -$0.15 to settle at $69.72. Apache Corporation (NYSE:APA), on the other hand, is down -10.71% year to date as of 02/13/2018. It currently trades at $37.70 and has returned -8.32% during the past week.
Occidental Petroleum Corporation (NYSE:OXY) and Apache Corporation (NYSE:APA) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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., compared to an EBITDA margin of 57.15% for Apache Corporation (APA). OXY’s ROI is -3.50% while APA has a ROI of -8.40%. The interpretation is that OXY’s business generates a higher return on investment than APA’s.
The value of a stock is simply the present value of its future free cash flows. OXY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.60. Comparatively, APA’s free cash flow per share was -0.82. On a percent-of-sales basis, OXY’s free cash flow was -4.55% while APA converted -5.84% of its revenues into cash flow. This means that, for a given level of sales, OXY is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. OXY has a current ratio of 1.10 compared to 1.50 for APA. This means that APA can more easily cover its most immediate liabilities over the next twelve months. OXY’s debt-to-equity ratio is 0.48 versus a D/E of 1.21 for APA. APA is therefore the more solvent of the two companies, and has lower financial risk.
OXY trades at a forward P/E of 29.10, a P/B of 2.58, and a P/S of 4.48, compared to a forward P/E of 27.84, a P/B of 2.05, and a P/S of 2.57 for APA. OXY is the expensive of the two stocks on an earnings, book value and sales basis. 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. OXY is currently priced at a -10.88% to its one-year price target of 78.23. Comparatively, APA is -25.24% relative to its price target of 50.43. This suggests that APA 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 2.60 for OXY and 3.00 for APA, which implies that analysts are more bullish on the outlook for APA.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. OXY has a beta of 0.62 and APA’s beta is 1.15. OXY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. OXY has a short ratio of 2.83 compared to a short interest of 7.81 for APA. This implies that the market is currently less bearish on the outlook for OXY.
Occidental Petroleum Corporation (NYSE:OXY) beats Apache Corporation (NYSE:APA) on a total of 7 of the 14 factors compared between the two stocks. OXY generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, OXY has better sentiment signals based on short interest.