Newfield Exploration Company (NYSE:NFX) shares are down more than -17.19% this year and recently decreased -2.50% or -$0.67 to settle at $26.11. EOG Resources, Inc. (NYSE:EOG), on the other hand, is down -5.04% year to date as of 02/13/2018. It currently trades at $102.47 and has returned -5.36% during the past week.
Newfield Exploration Company (NYSE:NFX) and EOG Resources, Inc. (NYSE:EOG) 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.
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. Analysts expect NFX to grow earnings at a 32.61% annual rate over the next 5 years.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 32.92% for EOG Resources, Inc. (EOG). NFX’s ROI is -27.90% while EOG has a ROI of -3.60%. The interpretation is that EOG’s business generates a higher return on investment than NFX’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. NFX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.79. Comparatively, EOG’s free cash flow per share was -0.40. On a percent-of-sales basis, NFX’s free cash flow was -10.72% while EOG converted -3.02% of its revenues into cash flow. This means that, for a given level of sales, EOG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. NFX has a current ratio of 1.20 compared to 1.30 for EOG. This means that EOG can more easily cover its most immediate liabilities over the next twelve months. NFX’s debt-to-equity ratio is 1.87 versus a D/E of 0.46 for EOG. NFX is therefore the more solvent of the two companies, and has lower financial risk.
NFX trades at a forward P/E of 8.52, a P/B of 3.99, and a P/S of 3.16, compared to a forward P/E of 31.46, a P/B of 4.23, and a P/S of 5.87 for EOG. NFX 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
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. NFX is currently priced at a -34.45% to its one-year price target of 39.83. Comparatively, EOG is -17.71% relative to its price target of 124.52. This suggests that NFX 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 2.10 for NFX and 2.10 for EOG, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. NFX has a beta of 1.44 and EOG’s beta is 1.08. EOG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. NFX has a short ratio of 2.95 compared to a short interest of 4.00 for EOG. This implies that the market is currently less bearish on the outlook for NFX.
Newfield Exploration Company (NYSE:NFX) beats EOG Resources, Inc. (NYSE:EOG) on a total of 7 of the 14 factors compared between the two stocks. NFX is growing fastly and is more profitable. In terms of valuation, NFX is the cheaper of the two stocks on an earnings, book value and sales basis, NFX is more undervalued relative to its price target. Finally, NFX has better sentiment signals based on short interest.