Critical Comparison: Occidental Petroleum Corporation (OXY) vs. BHP Group (BBL)

Occidental Petroleum Corporation (NYSE:OXY) shares are down more than -27.08% this year and recently decreased -0.51% or -$0.23 to settle at $44.76. BHP Group (NYSE:BBL), on the other hand, is up 10.27% year to date as of 08/13/2019. It currently trades at $44.02 and has returned 1.36% during the past week.

Occidental Petroleum Corporation (NYSE:OXY) and BHP Group (NYSE:BBL) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect OXY to grow earnings at a -5.45% annual rate over the next 5 years. Comparatively, BBL is expected to grow at a 5.30% annual rate. All else equal, BBL’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Occidental Petroleum Corporation (OXY) has an EBITDA margin of 41.83%. This suggests that OXY underlying business is more profitable OXY’s ROI is 9.50% while BBL has a ROI of 13.70%. The interpretation is that BBL’s business generates a higher return on investment than OXY’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. OXY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.29. Comparatively, BBL’s free cash flow per share was -. On a percent-of-sales basis, OXY’s free cash flow was 1.22% while BBL converted 0% of its revenues into cash flow. This means that, for a given level of sales, OXY is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. OXY has a current ratio of 1.20 compared to 2.50 for BBL. This means that BBL can more easily cover its most immediate liabilities over the next twelve months. OXY’s debt-to-equity ratio is 0.48 versus a D/E of 0.50 for BBL. BBL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

OXY trades at a forward P/E of 15.28, a P/B of 1.57, and a P/S of 1.83, compared to a forward P/E of 13.32, a P/B of 2.30, and a P/S of 2.84 for BBL. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. OXY is currently priced at a -26.7% to its one-year price target of 61.06. Comparatively, BBL is -13.72% relative to its price target of 51.02. This suggests that OXY is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. OXY has a beta of 0.84 and BBL’s beta is 0.99. OXY’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. OXY has a short ratio of 4.72 compared to a short interest of 2.03 for BBL. This implies that the market is currently less bearish on the outlook for BBL.

Summary

Occidental Petroleum Corporation (NYSE:OXY) beats BHP Group (NYSE:BBL) on a total of 9 of the 14 factors compared between the two stocks. OXY is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, OXY is the cheaper of the two stocks on book value and sales basis, OXY is more undervalued relative to its price target.