Noble Energy, Inc. (NYSE:NBL) shares are down more than -29.45% this year and recently decreased -0.11% or -$0.03 to settle at $26.85. Viper Energy Partners LP (NASDAQ:VNOM), on the other hand, is up 36.37% year to date as of 12/12/2017. It currently trades at $21.82 and has returned 0.51% during the past week.
Noble Energy, Inc. (NYSE:NBL) and Viper Energy Partners LP (NASDAQ:VNOM) 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect NBL to grow earnings at a 3.75% annual rate over the next 5 years. Comparatively, VNOM is expected to grow at a 30.15% annual rate. All else equal, VNOM’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 54.47% for Viper Energy Partners LP (VNOM). NBL’s ROI is -3.10% while VNOM has a ROI of -1.40%. The interpretation is that VNOM’s business generates a higher return on investment than NBL’s.
The value of a stock is simply the present value of its future free cash flows. NBL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.51. Comparatively, VNOM’s free cash flow per share was -1.66. On a percent-of-sales basis, NBL’s free cash flow was -7.11% while VNOM converted -0.24% of its revenues into cash flow. This means that, for a given level of sales, VNOM is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. NBL has a current ratio of 1.00 compared to 8.90 for VNOM. This means that VNOM can more easily cover its most immediate liabilities over the next twelve months. NBL’s debt-to-equity ratio is 0.80 versus a D/E of 0.04 for VNOM. NBL is therefore the more solvent of the two companies, and has lower financial risk.
NBL trades at a forward P/E of 583.70, a P/B of 1.38, and a P/S of 3.21, compared to a forward P/E of 17.40, a P/B of 2.65, and a P/S of 17.39 for VNOM. 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”. NBL is currently priced at a -24.66% to its one-year price target of 35.64. Comparatively, VNOM is -8.51% relative to its price target of 23.85. This suggests that NBL 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 2.20 for NBL and 1.70 for VNOM, which implies that analysts are more bullish on the outlook for NBL.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. NBL has a beta of 1.15 and VNOM’s beta is 1.02. VNOM’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. NBL has a short ratio of 3.43 compared to a short interest of 2.11 for VNOM. This implies that the market is currently less bearish on the outlook for VNOM.
Viper Energy Partners LP (NASDAQ:VNOM) beats Noble Energy, Inc. (NYSE:NBL) on a total of 10 of the 14 factors compared between the two stocks. VNOM has higher cash flow per share, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, VNOM has better sentiment signals based on short interest.