Earnings

Critical Comparison: WPX Energy, Inc. (WPX) vs. Newfield Exploration Company (NFX)

WPX Energy, Inc. (NYSE:WPX) shares are down more than -10.84% this year and recently decreased -4.27% or -$0.55 to settle at $12.44. Newfield Exploration Company (NYSE:NFX), on the other hand, is down -24.54% year to date as of 12/05/2017. It currently trades at $28.93 and has returned 2.14% during the past week.

WPX Energy, Inc. (NYSE:WPX) and Newfield Exploration Company (NYSE:NFX) are the two most active stocks in the Independent 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, NFX is expected to grow at a 19.80% annual rate. All else equal, NFX’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 52% for Newfield Exploration Company (NFX). WPX’s ROI is -7.00% while NFX has a ROI of -27.90%. The interpretation is that WPX’s business generates a higher return on investment than NFX’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. WPX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.58. Comparatively, NFX’s free cash flow per share was -0.79. On a percent-of-sales basis, WPX’s free cash flow was -0.03% while NFX converted -10.72% of its revenues into cash flow. This means that, for a given level of sales, WPX 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. WPX has a current ratio of 1.00 compared to 1.20 for NFX. This means that NFX can more easily cover its most immediate liabilities over the next twelve months. WPX’s debt-to-equity ratio is 0.00 versus a D/E of 1.87 for NFX. NFX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

WPX trades at a forward P/E of 649.50, a P/B of 1.32, and a P/S of 4.36, compared to a forward P/E of 11.86, a P/B of 4.67, and a P/S of 3.64 for NFX. WPX is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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”. WPX is currently priced at a -25.6% to its one-year price target of 16.72. Comparatively, NFX is -21.13% relative to its price target of 36.68. This suggests that WPX 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 1.80 for WPX and 2.00 for NFX, which implies that analysts are more bullish on the outlook for NFX.

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. WPX has a beta of 2.46 and NFX’s beta is 1.45. NFX’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. WPX has a short ratio of 4.38 compared to a short interest of 2.91 for NFX. This implies that the market is currently less bearish on the outlook for NFX.

Summary

Newfield Exploration Company (NYSE:NFX) beats WPX Energy, Inc. (NYSE:WPX) on a total of 7 of the 14 factors compared between the two stocks. NFX generates a higher return on investment, is more profitable and higher liquidity. In terms of valuation, NFX is the cheaper of the two stocks on an earnings and sales basis, Finally, NFX has better sentiment signals based on short interest.

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