Global

Critical Comparison: Apache Corporation (APA) vs. EOG Resources, Inc. (EOG)

Apache Corporation (NYSE:APA) shares are down more than -1.44% this year and recently decreased -2.98% or -$1.28 to settle at $41.61. EOG Resources, Inc. (NYSE:EOG), on the other hand, is up 5.81% year to date as of 06/15/2018. It currently trades at $114.18 and has returned -2.97% during the past week.

Apache Corporation (NYSE:APA) and EOG Resources, Inc. (NYSE:EOG) are the two most active stocks in the Independent Oil & Gas 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

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect APA to grow earnings at a 76.21% annual rate over the next 5 years.

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 38.38% for EOG Resources, Inc. (EOG). APA’s ROI is 10.20% while EOG has a ROI of 2.90%. The interpretation is that APA’s business generates a higher return on investment than EOG’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. APA’s free cash flow (“FCF”) per share for the trailing twelve months was -0.93. Comparatively, EOG’s free cash flow per share was +0.02. On a percent-of-sales basis, APA’s free cash flow was -5.53% while EOG converted 0.1% 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. APA has a current ratio of 1.40 compared to 1.30 for EOG. This means that APA can more easily cover its most immediate liabilities over the next twelve months. APA’s debt-to-equity ratio is 1.11 versus a D/E of 0.38 for EOG. APA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

APA trades at a forward P/E of 22.46, a P/B of 2.12, and a P/S of 2.65, compared to a forward P/E of 18.35, a P/B of 3.90, and a P/S of 5.27 for EOG. 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. APA is currently priced at a -9.92% to its one-year price target of 46.19. Comparatively, EOG is -13.54% relative to its price target of 132.06. This suggests that EOG is the better investment over the next year.

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. APA has a beta of 1.10 and EOG’s beta is 1.05. 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. APA has a short ratio of 6.65 compared to a short interest of 3.21 for EOG. This implies that the market is currently less bearish on the outlook for EOG.

Summary

EOG Resources, Inc. (NYSE:EOG) beats Apache Corporation (NYSE:APA) on a total of 8 of the 14 factors compared between the two stocks. EOG is growing fastly, has a higher cash conversion rate and has lower financial risk. EOG is more undervalued relative to its price target. Finally, EOG has better sentiment signals based on short interest.

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