Earnings

A Side-by-side Analysis of Oasis Petroleum Inc. (OAS) and PDC Energy, Inc. (PDCE)

Oasis Petroleum Inc. (NYSE:OAS) shares are down more than -44.98% this year and recently decreased -17.20% or -$1.73 to settle at $8.33. PDC Energy, Inc. (NASDAQ:PDCE), on the other hand, is down -37.45% year to date as of 12/12/2017. It currently trades at $45.40 and has returned 5.48% during the past week.

Oasis Petroleum Inc. (NYSE:OAS) and PDC Energy, Inc. (NASDAQ:PDCE) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, PDCE is expected to grow at a 38.40% annual rate. All else equal, PDCE’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 18.8% for PDC Energy, Inc. (PDCE). OAS’s ROI is 0.00% while PDCE has a ROI of -5.00%. The interpretation is that OAS’s business generates a higher return on investment than PDCE’s.

Cash Flow 




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, PDCE’s free cash flow per share was -0.94. On a percent-of-sales basis, OAS’s free cash flow was -0.01% while PDCE converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, OAS 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. OAS has a current ratio of 0.80 compared to 0.90 for PDCE. This means that PDCE 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 0.44 for PDCE. OAS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

OAS trades at a forward P/E of 105.44, a P/B of 0.66, and a P/S of 1.86, compared to a forward P/E of 55.84, a P/B of 1.23, and a P/S of 3.44 for PDCE. 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”. OAS is currently priced at a -34.1% to its one-year price target of 12.64. Comparatively, PDCE is -24.75% relative to its price target of 60.33. 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 2.00 for PDCE, which implies that analysts are equally bullish on their outlook for the two stocks.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. OAS has a beta of 2.32 and PDCE’s beta is 0.82. PDCE’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. OAS has a short ratio of 4.63 compared to a short interest of 6.80 for PDCE. This implies that the market is currently less bearish on the outlook for OAS.

Summary

Oasis Petroleum Inc. (NYSE:OAS) beats PDC Energy, Inc. (NASDAQ:PDCE) on a total of 8 of the 14 factors compared between the two stocks. OAS is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, OAS is the cheaper of the two stocks on book value and sales basis, OAS is more undervalued relative to its price target. Finally, OAS has better sentiment signals based on short interest.

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