Chevron vs. ConocoPhillips: Which Oil & Gas Stock is a Better Buy?

Amid tight supply and soaring demand, gas prices have surged to a seven-year high of $3.40 a gallon. Low investment in new drilling and supply chain problems are also contributing to the rise in gas prices. Moreover, Bank of America said Brent crude could reach as much as $120 per barrel by the middle of next year. Saudi Arabia’s state oil producer Aramco also raised the December official selling price for its flagship Arab Light for Asia by $1.40 per barrel from November levels signaling prices to increase. The world is still largely dependent on plentiful supplies of fuel such as oil and gas. So, both Chevron Corporation (CVX) and ConocoPhillips (COP) could benefit from the steady demand.

CVX engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. It is also involved in cash management and debt financing activities, insurance operations, real estate activities, and technology businesses.

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. 

COP has gained 28.1% over the past six months, while CVX has returned 4.2%. Also, COP’s 82.6% gains year-to-date are significantly higher than CVX’s 35.2% returns. Moreover, COP is the clear winner with 105.5% gains versus CVX’s 37.4% returns in terms of the past year’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On September 20, 2021, COP announced several actions to enhance its compelling, distinctive investment proposition further. Ryan Lance, COP’s Chairman and CEO, said, “Our underlying business drivers will be stronger and the expanded cash flows derived from this transaction mean shareholders will benefit from higher returns of capital consistent with our commitment to return of capital of at least 30% of cash from operations."

On October 14, 2021, Chevron U.S.A. Inc., a subsidiary of CVX, and Gevo, Inc. (GEVO) announced a letter of intent to jointly invest in building and operating one or more new facilities that would process inedible corn to produce sustainable aviation fuel. Mark Nelson, executive vice president of Downstream & Chemicals for CVX, said, “Chevron is providing our customers with next-generation renewable fuels that can help them lower their overall carbon footprint.”

 Recent Financial Results

COP’s total production increased 44.7% year-over-year to 1,544 MBoe/d for the fiscal third quarter ended September 30, 2021, 2021. The company’s adjusted earnings came in at $2.37 billion compared to a loss of $331 million in the prior-year quarter. Also, its adjusted EPS came in at $1.77 compared to a loss of $0.31 in the year-ago period.

CVX’s sales and other operating revenues increased 79.2% year-over-year to $43 billion for the fiscal third quarter ended September 30, 2021, 2021. The company’s adjusted earnings grew 1,676.5% year-over-year to $5.70 billion. Also, its adjusted EPS came in at $2.96, up 1544.4% year-over-year.

Past and Expected Financial Performance

COP’s revenue grew at a CAGR of 9.8% over the past five years. Analysts expect COP’s revenue to increase 116.7% in the current quarter and 124.4% in the current year. The company’s EPS is expected to grow 201.4% in the next quarter and 33.1% in the next year.

On the other hand, CVX’s revenue grew at a CAGR of 5.9% over the past five years. The company’s revenue is expected to increase 77.2% in the current quarter and 64.1% in the current year. Its EPS is expected to grow 177.8% in the next quarter and 15.3% in the next year.

Profitability

CVX’s trailing-12-month revenue is 3.66 times what COP generates. However, COP is more profitable with a gross profit margin and net income margin of 47.51% and 12.72% compared to CVX’s 43.96% and 7.36%, respectively.

Furthermore, COP’s ROE, ROA, and ROTC of 12.50%, 5.79%, and 7.93% are higher than CVX’s 7.41%, 3.53%, and 4.79%, respectively.

Valuation

In terms of forward non-GAAP P/E, CVX is currently trading at 13.89x, 12.1% higher than COP’s 12.39x. Moreover, CVX’s forward EV/EBITDA ratio of 6.10x is 16.6% higher than COP’s 5.23x.

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, CVX 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 an A grade for Momentum. This is justified given COP’s 29.3% returns over the past three months and 54.5% gains over the past nine months. In comparison, CVX has a B grade for Momentum.

In addition, COP has a B grade for Sentiment, consistent with analysts’ expectations that its EPS and revenue will increase significantly in the upcoming months. On the other hand, CVX has a C grade for Sentiment, in sync with analysts’ expectations that its EPS and revenue will increase in the near term but at a modest rate.

Of the 84 stocks in the Energy - Oil & Gas industry, COP is ranked #11. In contrast, CVX is ranked #36.

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

The Winner

As the oil deficit remains unresolved, and OPEC+ refuses to increase supply significantly, oil prices are expected to remain high with the continued reopening of the economy. While both COP and CVX are expected to gain, I believe COP is a better investment now because of its lower valuation, higher profit margin, and better growth prospects.

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

CVX shares were trading at $114.37 per share on Thursday afternoon, up $0.22 (+0.19%). Year-to-date, CVX has gained 40.90%, versus a 25.40% 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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