Finance

BP p.l.c. (BP) vs. Centennial Resource Development, Inc. (CDEV): Which is the Better Investment?

BP p.l.c. (NYSE:BP) shares are up more than 5.07% this year and recently decreased -1.34% or -$0.6 to settle at $44.16. Centennial Resource Development, Inc. (NASDAQ:CDEV), on the other hand, is down -12.73% year to date as of 06/21/2018. It currently trades at $17.28 and has returned 2.98% during the past week.

BP p.l.c. (NYSE:BP) and Centennial Resource Development, Inc. (NASDAQ:CDEV) are the two most active stocks in the Major Integrated Oil & Gas industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Comparatively, CDEV is expected to grow at a 60.85% annual rate. All else equal, CDEV’s higher growth rate would imply a greater potential for capital appreciation.

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. EBITDA margin of 34.97% for Centennial Resource Development, Inc. (CDEV). BP’s ROI is 2.10% while CDEV has a ROI of 2.20%. The interpretation is that CDEV’s business generates a higher return on investment than BP’s.

Cash Flow



Cash is king when it comes to investing. BP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, CDEV’s free cash flow per share was -0.84. On a percent-of-sales basis, BP’s free cash flow was -0.08% while CDEV converted -0.05% of its revenues into cash flow. This means that, for a given level of sales, CDEV 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. BP has a current ratio of 1.10 compared to 0.90 for CDEV. This means that BP can more easily cover its most immediate liabilities over the next twelve months. BP’s debt-to-equity ratio is 0.62 versus a D/E of 0.00 for CDEV. BP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BP trades at a forward P/E of 13.17, a P/B of 1.46, and a P/S of 0.58, compared to a forward P/E of 14.34, a P/B of 1.53, and a P/S of 7.91 for CDEV. BP 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. BP is currently priced at a -9.29% to its one-year price target of 48.68. Comparatively, CDEV is -32.89% relative to its price target of 25.75. This suggests that CDEV is the better investment over the next year.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. BP has a short ratio of 0.80 compared to a short interest of 5.31 for CDEV. This implies that the market is currently less bearish on the outlook for BP.

Summary




Centennial Resource Development, Inc. (NASDAQ:CDEV) beats BP p.l.c. (NYSE:BP) on a total of 8 of the 14 factors compared between the two stocks. CDEV has higher cash flow per share, is more profitable, generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. In terms of valuation, BP is the cheaper of the two stocks on an earnings, book value and sales basis, CDEV is more undervalued relative to its price target. Finally, OXY has better sentiment signals based on short interest.

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