Abraxas Petroleum Corporation (NASDAQ:AXAS) shares are up more than 4.88% this year and recently decreased -3.01% or -$0.08 to settle at $2.58. Gastar Exploration Inc. (NYSE:GST), on the other hand, is up 13.33% year to date as of 01/16/2018. It currently trades at $1.19 and has returned -13.14% during the past week.
Abraxas Petroleum Corporation (NASDAQ:AXAS) and Gastar Exploration Inc. (NYSE:GST) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AXAS to grow earnings at a 2.00% annual rate over the next 5 years. Comparatively, GST is expected to grow at a 4.00% annual rate. All else equal, GST’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., compared to an EBITDA margin of 41.65% for Gastar Exploration Inc. (GST). AXAS’s ROI is -63.30% while GST has a ROI of -20.40%. The interpretation is that GST’s business generates a higher return on investment than AXAS’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. AXAS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.23. Comparatively, GST’s free cash flow per share was -0.08. On a percent-of-sales basis, AXAS’s free cash flow was -0.07% while GST converted -0.03% of its revenues into cash flow. This means that, for a given level of sales, GST 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. AXAS has a current ratio of 0.50 compared to 1.40 for GST. This means that GST can more easily cover its most immediate liabilities over the next twelve months.
AXAS trades at a forward P/E of 9.28, a P/B of 3.85, and a P/S of 5.68, compared to a P/S of 3.32 for GST. AXAS 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AXAS is currently priced at a -4.09% to its one-year price target of 2.69. Comparatively, GST is 19% relative to its price target of 1.00. This suggests that AXAS 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 1.40 for AXAS and 2.70 for GST, which implies that analysts are more bullish on the outlook for GST.
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. AXAS has a beta of 1.54 and GST’s beta is 3.83. AXAS’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. AXAS has a short ratio of 1.08 compared to a short interest of 16.48 for GST. This implies that the market is currently less bearish on the outlook for AXAS.
Gastar Exploration Inc. (NYSE:GST) beats Abraxas Petroleum Corporation (NASDAQ:AXAS) on a total of 9 of the 14 factors compared between the two stocks. GST is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, GST is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, MRO has better sentiment signals based on short interest.