ConocoPhillips vs. Pioneer Natural Resources: Which Oil & Gas Stock is a Better Buy?

Oil prices are currently above $90 a barrel, the highest since 2014, due to steady demand recovery amid tight supply. In addition, Russia’s military buildup on the Ukraine border has significant implications for oil and gas prices. Moreover, despite net-zero pledges, big banks invest billions into oil and gas companies to drill new oil wells and tap fresh gas reserves, which should bode well for the oil and gas industry. 

ConocoPhillips (COP) explores, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. The company primarily engages in conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations. On the other hand, Pioneer Natural Resources Company (PXD) operates as an independent oil and gas exploration and production company in the United States. The company explores, develops, and produces oil, natural gas liquids, and gas. It has operations in the Permian Basin in West Texas.

Over the past year, COP has gained 82% and PXD has returned 63%. Which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On February 3, 2022, COP announced a $1 billion increase in expected 2022 return of capital to shareholders to a new total of $8 billion, an increase of more than 30% over 2021. The company also declared both an ordinary dividend of 46 cents per share and a second-quarter variable return of cash payment of 30 cents per share, a 50% increase over the first-quarter VROC. Combined, the targeted 2022 ordinary dividend and VROC represent a more than 50% increase in cash return to shareholders compared to 2021.

On December 22, 2021, PXD announced the completion of the divestiture of its Delaware Basin assets to Continental Resources (CLR) for cash proceeds of $3.10 billion after normal closing adjustments.

Recent Financial Results

COP’s total revenue and other income increased 163.9% year-over-year to 15.96 billion for the fiscal fourth quarter ended December 31, 2021. The company’s adjusted earnings came in at $3 billion compared to a loss of $201 million in the prior-year quarter. Also, its adjusted EPS came in at $2.27 compared to a loss of $0.19 in the year-ago period.

PXD’s revenues and other income increased 157.8% year-over-year to $4.46 billion for the fiscal third quarter ended September 30, 2021, 2021. The company’s net income came in at $1.05 billion compared to a loss of $85 million in the prior-year quarter. Also, its EPS came in at $4.07 compared to a loss per share of $0.52 in the year-ago period.

Past and Expected Financial Performance

COP’s revenue and net income grew at CAGRs of 7.6% and 8.9%, respectively, over the past three years. Analysts expect COP’s revenue to increase 45.1% for the quarter ending March 31, 2022, and 17.7% in fiscal 2022. The company’s EPS is expected to grow 247.8% for the quarter ending March 31, 2022, and 48.9% in fiscal 2022. Moreover, its EPS is expected to grow at 1.8% per annum over the next five years.

On the other hand, PXD’s revenue and net income grew at CAGRs of 17% and 1.9%, respectively, over the past three years. The company’s revenue is expected to increase 108.7% for the quarter ending March 31, 2022, and 18.4% in fiscal 2022. Its EPS is expected to grow 210.7% for the quarter ending March 31, 2022, and 64.9% in fiscal 2022. Also, PXD’s EPS is expected to increase by 83.3% per annum over the next five years.

Profitability

COP’s trailing-12-month revenue is 3.26 times what PXD generates. COP is also more profitable with a net income margin and levered FCF margin of 17.31% and 22.09% compared to PXD’s 9.77% and 18.88%, respectively.

Furthermore, COP’s ROE, ROA, and ROTC of 21.47%, 10.33%, and 14.21% are higher than PXD’s 8.02%, 4.60%, and 5.70%, respectively.

Valuation

In terms of forward non-GAAP P/E, PXD is currently trading at 17.68x, 69.8% higher than COP’s 10.41x. Moreover, PXD’s forward EV/EBITDA ratio of 9.23x is 82.1% higher than COP’s 5.07x.

So, COP is relatively affordable here.

POWR Ratings

COP has an overall rating of B, which equates to a Buy in our proprietary POWR Rating system. On the other hand, PXD has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

COP has a B grade for Sentiment. On the other hand, PXD has a C grade for Sentiment.

Also, COP has a grade of B for Quality. On the other hand, PXD has a Quality grade of C.

Moreover, COP has a C grade for Value, consistent with its forward EV/EBIT of 7.30x, 46.1% lower than the industry average of 13.54x. However, PXD has a D grade for Value, in sync with its forward EV/EBIT of 14.79x, 9.3% higher than the industry average of 13.54x.

Of the 81 stocks in the B-rated Energy - Oil & Gas industry, COP is ranked #11. In contrast, PXD is ranked #68.

Beyond what I’ve stated above, we have also rated the stocks for Momentum, Growth, and Stability. Click here to view all the COP ratings. Also, get all the PXD ratings here.

The Winner

Since oil and gas prices are expected to remain high, COP and PXD should benefit. However, it’s better to bet on COP now because of its lower valuation and higher profitability.

Our research shows that odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the other top-rated stocks in the Energy - Oil & Gas industry here.

COP shares were unchanged in after-hours trading Wednesday. Year-to-date, COP has gained 25.61%, versus a -5.97% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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