Oasis Petroleum Inc. (NYSE:OAS) shares are down more than -33.62% this year and recently decreased -3.03% or -$0.31 to settle at $9.74. Continental Resources, Inc. (NYSE:CLR), on the other hand, is down -8.01% year to date as of 12/05/2017. It currently trades at $46.62 and has returned 4.04% during the past week.
Oasis Petroleum Inc. (NYSE:OAS) and Continental Resources, Inc. (NYSE:CLR) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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, CLR is expected to grow at a 0.60% annual rate. All else equal, CLR’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 10.33% for Continental Resources, Inc. (CLR). OAS’s ROI is 0.00% while CLR has a ROI of -0.70%. The interpretation is that OAS’s business generates a higher return on investment than CLR’s.
Cash is king when it comes to investing. OAS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.44. Comparatively, CLR’s free cash flow per share was +1.15. On a percent-of-sales basis, OAS’s free cash flow was -0.01% while CLR converted 21.78% of its revenues into cash flow. This means that, for a given level of sales, CLR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. OAS has a current ratio of 0.80 compared to 0.90 for CLR. This means that CLR can more easily cover its most immediate liabilities over the next twelve months. OAS’s debt-to-equity ratio is 0.80 versus a D/E of 1.55 for CLR. CLR is therefore the more solvent of the two companies, and has lower financial risk.
OAS trades at a forward P/E of 128.85, a P/B of 0.80, and a P/S of 2.21, compared to a forward P/E of 55.71, a P/B of 4.12, and a P/S of 6.60 for CLR. 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. OAS is currently priced at a -22.76% to its one-year price target of 12.61. Comparatively, CLR is -7.08% relative to its price target of 50.17. This suggests that OAS 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 2.00 for OAS and 1.90 for CLR, which implies that analysts are more bullish on the outlook for OAS.
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. OAS has a beta of 2.30 and CLR’s beta is 1.42. CLR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. OAS has a short ratio of 4.54 compared to a short interest of 6.37 for CLR. This implies that the market is currently less bearish on the outlook for OAS.
Continental Resources, Inc. (NYSE:CLR) beats Oasis Petroleum Inc. (NYSE:OAS) on a total of 7 of the 14 factors compared between the two stocks. CLR is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. Finally, PE has better sentiment signals based on short interest.