EOG - EOG Resources vs. Occidental: Which Oil & Gas Stock is a Better Buy?

EOG Resources, Inc. (EOG) explores, develops, produces, and markets crude oil, natural gas and natural gas liquids worldwide. Its operations are focused on the productive basins in the United States, with a focus on crude oil and, to a lesser extent, on liquids-rich natural gas. It has operations offshore Trinidad, in the United Kingdom East Irish Sea, in China’s Sichuan Basin and in Canada.

Occidental Petroleum Corporation (OXY) is an international oil and gas exploration and production company that has operations in the United States, the Middle East and Latin America. The company's Oil and Gas segment explores, develops and produces oil and condensate natural gas liquids and natural gas.

After hitting historic lows in April 2020, the oil and gas industry has recovered significantly, primarily on the back of voluntary production cuts by OPEC+ countries. While the alliance has decided to gradually curb production cuts beginning this month, rising demand for crude oil on the reopening of the economies worldwide should keep oil prices at around their current levels in the coming months.

Furthermore, because there is greater interest in reducing carbon emissions over the next few decades, many companies in the oil and gas industry have started to invest heavily in technological solutions to the carbon emissions challenge. In addition to reducing their operating expenses significantly, this approach should help them progress toward their sustainability goals. The global oil and gas upstream activities market is expected to grow at a 6% CAGR over the next four years to reach $4.24 trillion by 2025.

But while OXY lost 9.7% over the past three months, EOG surged 10.7%. In terms of their performance so far this year, EOG is a clear winner with 60.7% gains versus OXY's 47% returns. But, which of these stocks is a better pick now? Let’s find out.

Click here to check out our Industrial Sector Report for 2021

Latest Movements

On May 6, after EOG announced its impressive 2021 first quarter earnings, generating a record $1.07 billion in free cash flow and declaring a special dividend of $1 per share, payable July 30, 2021, shares of EOG climbed last week. EOG’s total crude oil and condensate volumes have been set at 437.5 - 448.5 MBod for the second quarter of 2021, after achieving 431 MBod in the first quarter. Its average crude oil and condensate prices have increased 23.6% year-over-year to $58.02/Bbl.

Alos on May 6, OXY also declared a $0.01 per share quarterly dividend, payable July 15. Oxy Low Carbon Ventures (OLCV), an OXY subsidiary, and bio-engineering startup Cemvita Factory, announced on April 6 that they will construct and operate a one metric ton per month bio-ethylene pilot plant, applying a jointly developed technology using human-made carbon dioxide (CO2) instead of hydrocarbon-sourced feedstocks. This initiative should provide an opportunity to offer a new, non-hydrocarbon-sourced ethylene product to the market, reduce carbon emissions, and benefit OxyChem, a large producer and consumer of ethylene in its chlorovinyls business.

Recent Financial Results

EOG’s total revenues from its crude oil and condensate division for its fiscal year 2021 first quarter, ended March 31, increased more than 9% year-over-year to $2.25 billion. Its revenue from its natural gas division increased 197.6% year-over-year to $625 million. The company’s operating income came in at $932 million, up 1506.9% from the prior-year period. While its adjusted net income increased 197.5% year-over-year to $946 million, its adjusted EPS increased 194.5% year-over-year to $1.62. The company generated free cash flow of $1.07 billion in the first quarter of 2021.

For its fiscal year 2021 first quarter ended March 31, 2021, OXY’s revenue from its oil and gas segment decreased 9.8% year-over-year to $3.74 billion. The company’s total revenues decreased 17.7% year-over-year to $5.48 billion. However, its income from continuing operations came in at $299 million, compared to a $2.01 billion loss in the first quarter of 2020. Its net loss came in at $346 million for the quarter, which represents a 545% year-over-year decline. Its loss per share decreased 85.5% year-over-year to $0.36.

Past and Expected Financial Performance

EOG’s tangible book value and total assets grew at CAGRs of 7.2% and 5.6%, respectively, over the past three years. The company’s EBITDA has declined at a rate of 8% over the past three years.

Analysts expect EOG’s revenue to increase 249% year-over-year for its fiscal year 2021 second quarter (ending June 30, 2021), 40.1% in the current year ending December 31, 2021 and 5.9% in the next fiscal ending December 31, 2022. Its EPS is expected to increase 687% year-over-year for the second quarter, 308.2% for the current year and 4.4% next year. EOG’s EPS is expected to grow at a 49.3% rate per annum over the next five years.

In comparison, OXY’s EBITDA and tangible book value declined at CAGRs of 0.2% and 25.6%, respectively, over the past three years. The company’s total assets have increased at a 22.8% CAGR over the past three years.

Analysts expect OXY’s revenue to rise 81.2% in its fiscal year 2021 second quarter (ending June 30, 2021), 35.2% in the current year ending December 31, 2021, but decline 1.3% in the next fiscal ending December 31, 2022. Its EPS is expected to stay negative in the coming quarters and fall at a 5.2% rate per annum over the next five years.

Profitability

OXY’s trailing-12-month revenue is 1.57 times EOG’s. However, EOG is more profitable, with a 53.4% gross profit margin compared to OXY’s 51%.

Also, EOG’s ROA and ROTC values of 1.1% and 1.5% respectively, compare with OXY’s negative values.

Valuation

In terms of forward EV/EBITDA, OXY is currently trading at 6.65x, 18.1% higher than EOG, which is currently trading at 5.63x. Also, EOG’s 2.25x trailing-12-month price-to-book  is significantly lower than OXY’s 2.75x.

Thus, EOG looks more affordable here.

POWR Ratings

While OXY has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, EOG has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

Both stocks have an A grade for Momentum, which is consistent with their impressive year-to-date price gains. EOG has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios compared to its peers. However, OXY has a C grade for Quality, which reflects its negative net income margin, EBIT margin and return on equity.

Also, EOG has a B grade for Growth, which is in sync with its 31.7% year-over-year rise in working capital, which is 1522.6% higher than the industry average. However, OXY’s D grade for Growth signifies its limited growth potential, as justified by the company’s negative value for its working capital growth.

Of 93 stocks in the Energy - Oil & Gas industry, OXY is ranked #59, while EOG is ranked #20.

Beyond what we’ve stated above, our POWR Ratings system has also rated EOG and OXY for Sentiment, Stability, and Value. Get all OXY ratings here. Also, click here to see the additional POWR Ratings for EOG.

The Winner

Given the industry tailwinds, EOG and OXY are well-positioned to grow in the coming quarters, but EOG appears to be a better buy based on its growth prospects and higher profitability.

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 access the top-rated stocks in the Energy - Oil & Gas industry. 

EOG shares were trading at $79.11 per share on Tuesday afternoon, down $1.03 (-1.29%). Year-to-date, EOG has gained 60.51%, versus a 12.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

More...