Southwestern Energy vs. PDC Energy: Which Stock is a Better Buy?

Southwestern Energy Company (SWN) is a Houston, Tex.-based independent energy company that explores for, develops, and produces natural gas, oil, and natural gas liquids (NGLs). The company focuses on developing unconventional natural gas and oil reservoirs in Pennsylvania, Ohio, and West Virginia. Denver, Colo.-based PDC Energy, Inc. (PDCE) is also an independent exploration and production company that acquires, explores for, develops, and produces crude oil, natural gas, and natural gas liquids.

Oil and gas prices rose to multi-year highs this year, driven by solid demand amid supply cuts. As of December 15, gasoline prices had risen 58.1% over the  last year, their largest increase since April 1980. In addition, fuel oil prices increased 59.3%, while natural gas prices rose 25.1% over the past year.

According to the U.S. Energy Information Administration (EIA), U.S. implied petroleum products demand rose to a record 23.191 million bpd for the week ending December 10. Oil prices rose approximately 2% yesterday on the EIA’s report and Fed’s interest-rate-increase timeline, removing some uncertainties. Given the upbeat backdrop, we think oil and gas companies PDCE and SWN should benefit. Over the past nine months, PDCE’s stock has gained 22.8% in price, while SWN has returned 5.1%. In terms of their past year’s performance, PDCE is the winner with 139.3% gains versus SWN’s 48.2%. Also, PDCE’s 125.8% gains year-to-date compare with SWN’s 52.7% returns.

But which stock is a better buy now? Let’s find out.

Latest Developments

In November, SWN announced a definitive agreement with the third-largest private Haynesville producer–GEP Haynesville, LLC (GEP)--to acquire GEP for approximately $1.85 billion. The transaction is expected to close by year’s end. The acquisition is expected to strengthen SWN’s  foothold in Haynesville and enhance its operational capabilities.

On December 7, PDCE declared a special dividend of $0.50 per share in addition to a quarterly cash dividend of $0.12 per share, payable on December 29, 2021, to stockholders of record at the close of business on December 17, 2021. The company also expects to consistently repurchase shares through year’s end and anticipates free cash flow of more than $900 million in 2021. “PDC is now positioned for significant–and sustainable–shareholder returns in the coming years,” said President and CEO Bart Brookman.

Recent Financial Results

For the third quarter that ended September 30, SWN’s total operating revenues were  $1.60 billion, indicating a 203.2% increase year-over-year. Its operating income increased 266.9% from its year-ago loss to $636 million. Its adjusted net income rose 300% from the same period last year to $188 million, while its adjusted EPS increased 200% year-over-year to $0.24.

PDCE’s total revenues increased 95.2% year-over-year to $486.36 million in its fiscal third quarter, ended September 30. Its income from operations stood at $165.63 million, up 1,828% from the same period last year. And its adjusted net income grew 124% from its year-ago value to $233.40 million. The company’s non-GAAP EPS increased 124% year-over-year to $2.33.

Past and Expected Financial Performance

SWN’s revenues have grown at an 8.8%  CAGR over the past three years. Analysts expect SWN’s revenue to increase 82.1% in the current quarter, 115.1% in the current year, and 28.6% in the following year. The company’s EPS is expected to grow 83.3% in the current quarter, 178.9% in the current year, and 38.7% in the next year. However, its EPS is expected to decline 14.6% per annum over the next five years.

In comparison, PDCE’s revenues have grown  a 17% CAGR over the past three years. Analysts expect the company’s revenue to increase 138.2% in the current quarter, 22.8% in the current year, and 53.4% in the following year. The company’s EPS is expected to grow 139.1% in the current quarter, 235.2% in the current year, and 16.3% in the next year. PDCE’s EPS is expected to grow 27.2% per annum over the next five years.

Profitability

PDCE is more profitable with gross profit and  EBITDA margins of 86.24% and 39.27%, respectively, compared to SWN’s 46.19% and negative 31.94%.

Moreover, PDCE’s 1.65%, 1.39%, and 1.82% respective ROE, ROA, and ROTC compare with SWN’s negative 5,057.14%, 17.36%, and 32.92%.

Thus, PDCE is the more profitable stock.

Valuation

In terms of forward EV/Sales, PDCE is currently trading at 3.40x, which is 43.8% higher than SWN’s 1.91x. However, SWN’s 5.14 forward EV/EBITDA ratio is 28.4% higher than PDCE’s 3.68.

POWR Ratings

PDCE has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In contrast, SWN has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

PDCE has an A grade for Quality. This is justified because PDCE’s 86.24% gross profit margin is 121.8% higher than the 38.88% industry average. In comparison, SWN has a C grade for Quality. Its 46.19% gross profit margin is 18.8% higher than the industry average.

Both the stocks have B grades for Growth, which is  in sync with their stable rise in financials in their last reported quarter.

Of the 81 stocks in the Energy - Oil & Gas industry, PDCE is ranked #6, while SWN is ranked #66.

Beyond what we have stated above, we have also rated the stocks for Stability, Momentum, Value, and Growth. Click here to view PDCE ratings. Also, get all SWN ratings here.

The Winner

Oil and gas companies have gained significantly over the past year due to the rising demand and OPEC and its allies’ supply cuts. Oil prices recently took a dip but are again rising on positive economic trends. Thus, both SWN and PDCE should gain. However, we think its relatively higher profit margins make PDCE a better buy here.

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

SWN shares were trading at $4.56 per share on Friday morning, up $0.01 (+0.22%). Year-to-date, SWN has gained 53.02%, versus a 25.33% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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