Finance

Transocean Ltd. (RIG) vs. Whiting Petroleum Corporation (WLL): Breaking Down the Oil & Gas Drilling & Exploration Industry’s Two Hottest Stocks

Transocean Ltd. (NYSE:RIG) shares are up more than 8.52% this year and recently increased 4.41% or $0.49 to settle at $11.59. Whiting Petroleum Corporation (NYSE:WLL), on the other hand, is up 45.88% year to date as of 04/13/2018. It currently trades at $38.63 and has returned 14.63% during the past week.

Transocean Ltd. (NYSE:RIG) and Whiting Petroleum Corporation (NYSE:WLL) are the two most active stocks in the Oil & Gas Drilling & Exploration industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider 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, WLL is expected to grow at a 0.80% annual rate. All else equal, WLL’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 Return on Investment (ROI) to measure this. RIG’s ROI is -12.60% while WLL has a ROI of -12.70%. The interpretation is that RIG’s business generates a higher return on investment than WLL’s.

Cash Flow



Cash is king when it comes to investing. RIG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.37. Comparatively, WLL’s free cash flow per share was +0.76. On a percent-of-sales basis, RIG’s free cash flow was 5.71% while WLL converted 4.67% of its revenues into cash flow. This means that, for a given level of sales, RIG 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. RIG has a current ratio of 3.40 compared to 0.80 for WLL. This means that RIG can more easily cover its most immediate liabilities over the next twelve months. RIG’s debt-to-equity ratio is 0.58 versus a D/E of 0.95 for WLL. WLL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RIG trades at a P/B of 0.36, and a P/S of 1.72, compared to a forward P/E of 36.62, a P/B of 0.89, and a P/S of 2.31 for WLL. RIG 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. RIG is currently priced at a -4.53% to its one-year price target of 12.14. Comparatively, WLL is 4.26% relative to its price target of 37.05. This suggests that RIG is the better investment over the next year.

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. RIG has a beta of 1.46 and WLL’s beta is 2.95. RIG’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. RIG has a short ratio of 5.75 compared to a short interest of 3.09 for WLL. This implies that the market is currently less bearish on the outlook for WLL.

Summary

Transocean Ltd. (NYSE:RIG) beats Whiting Petroleum Corporation (NYSE:WLL) on a total of 9 of the 14 factors compared between the two stocks. RIG generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, RIG is the cheaper of the two stocks on an earnings, book value and sales basis, RIG is more undervalued relative to its price target. Finally, CRON has better sentiment signals based on short interest.

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