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Finance

Which Oil & Gas Company is a Better Buy?

ConocoPhillips (COP) and EOG Resources, Inc. (EOG) are two leading producers of crude oil and natural gas liquids worldwide. COP is involved mainly in conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations. EOG’s total estimated net proved reserves consists of 3,220 million barrels of oil equivalent, 813 MMBbl of natural gas liquid reserves, and 5,360 billion cubic feet of natural gas reserves.

Even though the oil and gas industry had been facing market headwinds since the beginning of the COVID-19 pandemic, its steady emergence from the initial days of the public health calamity has been impressive. Brent crude oil spot prices averaged $62 per barrel in February, up from $7/b average price in February 2020. This has been largely driven by a recovery in demand  on the back of vaccine rollouts, inventory declines and reduced supply due to the extension of existing supply cuts by the OPEC and OPEC+ countries.

Because the industry’s recovery is proceeding at a faster clip than many observers had anticipated, we believe companies like COP and EOG are positioned to reap the benefits.

While COP returned 109.9% over the past year, EOG gained 130.8%. In terms of past three-months’ performance, EOG is the clear winner with 39.9% gains versus COP’s 36.1%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

In January, COP completed the acquisition of Concho Resources after receiving approval from  shareholders of both companies. The company believes that this acquisition should help it generate superior returns, provide affordable energy to the world, and lead the structural change for the industry.

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Last  December,  COP announced a new oil discovery—the size of which ranges between 75 million and 200 million barrels of recoverable oil equivalent—in the Norwegian Sea. This marks the company’s fourth  discovery in the Norwegian Continental Shelf.

In January 2021, EOG promoted Ezra Y. Yacob to President of EOG from the position of Executive Vice President. His technical, operational and leadership skills should help him make  sound judgments in his new role and help drive business growth.

Recent Financial Results

In the fourth quarter, ended December 30, 2020, COP reported  an $0.8 billion loss compared with its fourth-quarter 2019 earnings of $0.7 billion. Its loss per share was  $0.72. The company’s net cash provided by operating activities was $1.67 billion, while its free cash flow was $604 million over this period.

EOG’s revenue has increased 32% sequentially to $2.97 billion in the fourth quarter ended December 31. The company’s cash and cash equivalents grew 64.2% from its year-ago value to $3.33 billion. Its non-GAAP adjusted net income rose 63.1% year-over-year to $411 million over this period.

Expected Financial Performance

Analysts expect COP’s revenue to increase 64% in the current year and 4.4% next year. Its EPS is expected to grow 310.3% in the current year, and 21.6% next year.

In comparison, analysts expect EOG’s revenue to increase 26.6% in the current year, and 4% next year. The company’s EPS is expected to increase 226.7% in the current year, and 4% next year. EOG’s EPS is expected to grow at a rate of 61.6% per annum over the next five years.

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Profitability      

COP’s trailing-12-month revenue is 1.93 times EOG’s. However, EOG is more profitable with a gross profit margin of 50.1% versus COP’s 35.4%.

Also, EOG’s EBITDA margin of 50.4% compares favorably with COP’s 24.8%.

Valuation

In terms of forward PEG, COP is currently trading at 3.24x, 264% higher than EOG, which is currently trading at 0.89x. Also, its trailing-12-month ev/ebitda of 18.59x is 97.1% higher than EOG’s 9.43x. In fact, COP’s trailing-12-month price/cash flow of 16.70x is 91.1% higher than the EOG’s 8.74x.

So, EOG is the more affordable stock.

POWR Ratings

EOG has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. However, COP has an overall C rating, which represents a Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Both EOG and COP have a Momentum Grade of A, consistent with their price returns over the past year.

In terms of Growth Grade, EOG has a B, consistent with its expected growth in earnings and revenues. In comparison, COP has a Growth Grade of C.

EOG has a B grade for Quality, which indicates  that it is more profitable than COP, which has a grade of C for Quality.

Among the 95 stocks in the D-rated Energy – Oil & Gas industry, EOG is ranked #9 while COP is ranked #24.

Our POWR Ratings system has also rated both EOG and COP for Value, Stability, and Sentiment. Get all EOG’s ratings here.  Click here to see the additional POWR Ratings for COP.

The Winner

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Despite its recent Concho acquisition, which has enhanced COP’s value and position in the oil and gas industry, its lofty valuation, weak financials and lower profitability make it a riskier investment compared to EOG.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the other top-rated stocks in the Energy – Oil & Gas industry.

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COP shares were trading at $56.40 per share on Tuesday morning, down $1.76 (-3.03%). Year-to-date, COP has gained 42.33%, versus a 6.26% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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