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

Occidental Petroleum Corporation (OXY) and Southwestern Energy Company (SWN) are two prominent players in the oil and gas industry. OXY engages in internationally acquiring, exploring, and developing oil and gas properties. The company operates through three segments ─ Oil and Gas; Chemical; and Marketing and Midstream. It also trades around its assets, including transportation and storage capacity, and invests in entities that conduct similar activities. On the other hand, SWN engages in the exploration, development, production, and transportation of natural gas, oil, and natural gas liquids (NGLs). The company focuses on the development of unconventional natural gas and oil reservoirs. It serves energy companies, utilities, and industrial purchasers of natural gas.

The oil and gas industry witnessed a huge surge in demand since the resumption of economic and industrial activities earlier this year. Though OPEC and its allies remain firm in their decision to continue production cuts to offset oversupply issues and recover the pre-pandemic global demand, the robust demand, tight inventories, and inflationary pressures have made the oil and natural gas prices hit multi-year highs recently.

Analysts forecast crude oil prices to hit $100/barrel in 2022. Investor rising optimism in the energy industry is evident from the Energy Select Sector SPDR ETF’s (XLE) 43.9% gains year-to-date, surpassing SPDR S&P 500 Trust ETF’s (SPY) 23.9% returns. The global oil and gas upstream activities market is expected to grow at a 6% CAGR and reach $4.24 billion by 2025. So, both OXY and SWN are expected to benefit.

While SWN lost 1.3% over the past nine months, OXY has surged 1.8%. OXY is a clear winner with 12.5% gains versus SWN’s negative returns in terms of its past three month’s performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On November 8, 2021, OXY’s Oxy Low Carbon Ventures (OLCV) subsidiary awarded a services contract to Worley, an Australian engineering company serving resources and energy sectors, for a facility being built in British Columbia to produce renewable fuels by capturing carbon dioxide from the atmosphere. Using Carbon Engineering’s Direct Air Capture and AIR TO FUELS technologies, the facility is expected to produce up to 26.4 million gallons of ultra-low carbon fuel annually for the local Canadian market. OXY expects Worley’s expertise could help advance the development of the AIR TO FUELS facility and gain a wider market reach.

On November 4, 2021, SWN entered into a definitive agreement to acquire GEP Haynesville, LLC, a leading producer and distributor of natural gas liquids, for approximately $1.85 billion. This acquisition will position SWN as the largest producer in Haynesville, enhance its presence in the top two premier natural gas basins in the US, and meet growing demand centers along with the Gulf Coast markets. Also, it is expected to deliver higher margins, enhanced economic returns, and improved per-share cash flow metrics.

Recent Financial Results

OXY’s total net sales for its fiscal third quarter ended September 30, 2021, increased 65.3% year-over-year to $6.79 billion. The company’s pre-tax income came in at $1.22 billion, compared to $4.06 billion in the prior-year period. OXY’s net income came in at $828 million, versus a $3.58 billion loss in the year-ago period. Its non-GAAP EPS came in at $0.87, compared to $0.85 in the prior-year period. The company had $2.06 billion in cash and cash equivalents as of September 30, 2021.

For its fiscal third quarter, ended September 30, 2021, SWN’s operating revenues increased 203.2% year-over-year to $1.60 billion. The company’s pre-tax loss came in at $1.86 billion, indicating a 213.3% rise from the year-ago period. SWN’s adjusted net income came in at $188 million for the quarter, representing a 300% year-over-year improvement. Its adjusted EPS increased 200% year-over-year to $0.24. The company had $12 million in cash and equivalents as of September 30, 2021.

Past and Expected Financial Performance

OXY’s revenue and total assets have grown at CAGRs of 10.3% and 19%, respectively, over the past three years.

Analysts expect OXY’s EPS to rise 154.7% year-over-year in the current year and 35.5% next year. Its revenue is expected to grow 58% year-over-year in the current year and 3.8% next year. The company’s EPS is expected to increase at a 37.4% rate per annum over the next five years.

In comparison, SWN’s revenue and total assets have increased at CAGRs of 8.8% and 9.4%, respectively, over the past three years.

SWN’s EPS is expected to grow 178.9% year-over-year in the current year and 38.7% next year. The company’s revenue is expected to increase 115.1% year-over-year in the current year and 30.4% next year. However, analysts expect the company’s EPS to decline at a rate of 14.6% per annum over the next five years.

Valuation

In terms of forward EV/EBITDA, SWN is currently trading at 4.90x, which is 2.3% higher than OXY’s 4.79x. In terms of trailing-12-month Price/Cash Flow, OXY’s 3.05x compares with SWN’s 5.26x.

Profitability

OXY’s trailing-12-month revenue is almost 4.9 times SWN’s. OXY is also more profitable, with a 46.4% EBITDA margin versus SWN’s 36.4%.

Furthermore, OXY’s ROA, ROE, and ROTC of 0.4%, 1.4%, and 2%, respectively, compare favorably with SWN’s negative returns.

POWR Ratings

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

Both OXY and SWN have been graded an A for Momentum, consistent with its impressive price gains over the past year. OXY’s stock gained 65.2% year-to-date, while SWN delivered 50.7% during the period.

OXY has a B grade for Quality, consistent with its higher-than-industry profitability ratios. OXY’s 46.4% trailing-12-month EBITDA margin is 123.9% higher than the 20.7% industry average. In comparison, SWN’s C grade for Quality is in sync with its negative profit margins.

Of the 81 stocks in the B-rated Energy - Oil & Gas industry, OXY is ranked #12, while SWN is ranked #67.

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

The Winner

Both OXY and SWN are expected to benefit from the rapid economic recovery and surging energy prices. However, relatively lower valuations and higher profit margins make OXY a better buy here.

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.

OXY shares rose $0.01 (+0.03%) in after-hours trading Wednesday. Year-to-date, OXY has gained 67.31%, versus a 26.76% rise in the benchmark S&P 500 index during the same period.

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.

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