California Resources Corporation (NYSE:CRC) shares are down more than -21.84% this year and recently decreased -2.80% or -$0.48 to settle at $16.64. Extraction Oil & Gas, Inc. (NASDAQ:XOG), on the other hand, is down -22.98% year to date as of 12/12/2017. It currently trades at $15.44 and has returned 1.35% during the past week.
California Resources Corporation (NYSE:CRC) and Extraction Oil & Gas, Inc. (NASDAQ:XOG) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CRC to grow earnings at a -11.60% annual rate over the next 5 years. Comparatively, XOG is expected to grow at a 30.00% annual rate. All else equal, XOG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 51.09% for Extraction Oil & Gas, Inc. (XOG). CRC’s ROI is 16.60% while XOG has a ROI of -13.30%. The interpretation is that CRC’s business generates a higher return on investment than XOG’s.
Cash is king when it comes to investing. CRC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.14. Comparatively, XOG’s free cash flow per share was -2.18. On a percent-of-sales basis, CRC’s free cash flow was 0.39% while XOG converted -0.13% of its revenues into cash flow. This means that, for a given level of sales, CRC 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. CRC has a current ratio of 0.60 compared to 1.00 for XOG. This means that XOG can more easily cover its most immediate liabilities over the next twelve months.
CRC trades at a P/S of 0.35, compared to a forward P/E of 46.77, a P/B of 1.62, and a P/S of 5.36 for XOG. CRC 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. CRC is currently priced at a 7.84% to its one-year price target of 15.43. Comparatively, XOG is -23.11% relative to its price target of 20.08. This suggests that XOG 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 3.00 for CRC and 1.80 for XOG, which implies that analysts are more bullish on the outlook for CRC.
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. CRC has a short ratio of 8.77 compared to a short interest of 8.63 for XOG. This implies that the market is currently less bearish on the outlook for XOG.
California Resources Corporation (NYSE:CRC) beats Extraction Oil & Gas, Inc. (NASDAQ:XOG) on a total of 7 of the 14 factors compared between the two stocks. CRC generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CRC is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, CIE has better sentiment signals based on short interest.