Earnings

Critical Comparison: Oasis Petroleum Inc. (OAS) vs. Noble Energy, Inc. (NBL)

Oasis Petroleum Inc. (NYSE:OAS) shares are down more than -8.20% this year and recently decreased -1.91% or -$0.15 to settle at $7.72. Noble Energy, Inc. (NYSE:NBL), on the other hand, is down -12.39% year to date as of 02/13/2018. It currently trades at $25.53 and has returned -9.37% during the past week.

Oasis Petroleum Inc. (NYSE:OAS) and Noble Energy, Inc. (NYSE:NBL) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, NBL is expected to grow at a 3.85% annual rate. All else equal, NBL’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Oasis Petroleum Inc. (OAS) has an EBITDA margin of 49.5%. This suggests that OAS underlying business is more profitable OAS’s ROI is 0.00% while NBL has a ROI of -3.10%. The interpretation is that OAS’s business generates a higher return on investment than NBL’s.

Cash Flow 




Cash is king when it comes to investing. OAS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.44. Comparatively, NBL’s free cash flow per share was -0.51. On a percent-of-sales basis, OAS’s free cash flow was -0.02% while NBL converted -7.11% of its revenues into cash flow. This means that, for a given level of sales, OAS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. OAS has a current ratio of 0.80 compared to 1.00 for NBL. This means that NBL can more easily cover its most immediate liabilities over the next twelve months. OAS’s debt-to-equity ratio is 0.80 versus a D/E of 0.80 for NBL. OAS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

OAS trades at a forward P/E of 37.12, a P/B of 0.61, and a P/S of 1.95, compared to a forward P/E of 52.10, a P/B of 1.31, and a P/S of 3.03 for NBL. OAS is the cheaper 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. OAS is currently priced at a -38.54% to its one-year price target of 12.56. Comparatively, NBL is -34.13% relative to its price target of 38.76. This suggests that OAS 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 2.20 for OAS and 2.10 for NBL, which implies that analysts are more bullish on the outlook for OAS.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. OAS has a beta of 2.01 and NBL’s beta is 1.23. NBL’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. OAS has a short ratio of 2.35 compared to a short interest of 3.63 for NBL. This implies that the market is currently less bearish on the outlook for OAS.

Summary

Oasis Petroleum Inc. (NYSE:OAS) beats Noble Energy, Inc. (NYSE:NBL) on a total of 9 of the 14 factors compared between the two stocks. OAS is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, OAS is the cheaper of the two stocks on an earnings, book value and sales basis, OAS is more undervalued relative to its price target. Finally, OAS has better sentiment signals based on short interest.

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