Amid strong global demand, the tight supply of oil and natural gas owing to continued sanctions on Russian oil and OPEC+’s moderate output hike has been keeping energy prices at high levels.
The Biden administration is trying to ease its sanctions on Venezuela, the Latin American oil giant, and plans to release 40% crude oil from Strategic Petroleum Reserve (SPR), the nation’s U.S. emergency oil supply, to improve the domestic oil supply. This should benefit domestic oil and gas companies.
Investors’ interest in this space is evident from the FlexShares Morningstar Global Upstream Natural Resources Index Fund’s (GUNR) 4.2% gains over the past week. The global oil & gas upstream activities market is expected to grow at 9.5% CAGR to reach $5.66 trillion by 2026.
Coterra Energy Inc. (CTRA) and Marathon Oil Corporation (MRO) are two popular independent oil and gas companies. CTRA is engaged in developing, exploring, and producing oil, natural gas, and natural gas liquids. It sells its natural gas to industrial customers, local distribution companies, oil and gas marketers, major energy companies, pipeline companies, and power generation facilities. As of December 31, 2021, it had proved reserves of approximately 2,892,582 thousand barrels of oil equivalent. MRO is an independent international energy company that engages in the exploration, production, and marketing of crude oil and condensate natural gas products, such as liquefied natural gas and methanol. It also owns and operates 32 central gathering and treating facilities, and the Sugarloaf gathering system, a 42-mile natural gas pipeline through Karnes and Atascosa Counties.
CTRA is a winner with 5.5% gains over the past week versus MRO’s 5.1% returns. But which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
CTRA’s operating revenues for its fiscal 2022 first quarter ended March 31, 2022, increased 265% year-over-year to $1.68 billion. The company’s income from operations came in at $799 million, up 356.6% from the prior-year period. While its adjusted net earnings increased 449% year-over-year to $818 million, its adjusted EPS grew 173% to $1.01. As of March 31, 2022, the company had $1.45 billion in cash and cash equivalents.
For its fiscal 2022 first quarter ended March 31, 2022, MRO’s total revenues and other income increased 63.7% year-over-year to $1.75 billion. The company’s income from operations came in at $805 million, indicating a 588% year-over-year improvement. Its adjusted net income came in at $749 million, up 351.2% from the year-ago period. MRO’s adjusted EPS came in at $1.02, indicating a 385.7% year-over-year improvement. As of March 31, 2022, the company had $681 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, CTRA’s net income and EPS have increased at CAGRs of 32.7% and 18.8%, respectively.
CTRA’s EPS is expected to increase 100.9% year-over-year in fiscal 2022, ending December 31, 2022, and fall 19.5% in fiscal 2023. Its revenue is expected to grow 138.3% in fiscal 2022 and decrease 9.5% in fiscal 2023. Analysts expect the company’s EPS to rise at a 4.8% rate per annum over the next five years.
Over the past three years, MRO’s net income and EPS have increased at CAGRs of 33.1% and 37.1%, respectively.
Analysts expect MRO’s EPS to grow 11.2% year-over-year in fiscal 2022, ending December 31, 2022, and 4.4% in fiscal 2023. Its revenue is expected to grow 3.1% year-over-year in fiscal 2022 and decline 0.2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 3.7% rate per annum over the next five years.
Valuation
In terms of forward EV/Sales, CTRA is currently trading at 3.54x, 20.8% higher than MRO’s 2.93x. In terms of non-GAAP forward PEG, MRO’s 5.98x compares with CTRA’s 7.27x.
Profitability
MRO’s trailing-12-month revenue is almost 1.2 times CTRA’s. However, CTRA is more profitable, with a 63.1% EBITDA margin versus MRO’s 61.8%.
Furthermore, CTRA’s ROE, ROA, and ROTC of 23.3%, 11.7%, and 15.6% compare with MRO’s 19.5%, 6.1%, and 6.9%, respectively.
POWR Ratings
While MRO has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CTRA 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 CTRA and MRO have been graded an A for Momentum, consistent with their impressive price returns. CTRA has gained 5.5% over the past week, while MRO has returned 5.1%.
MRO has a C grade for Value, in sync with its slightly higher-than-industry valuation ratios. MRO’s 3.67x trailing-12-month EV/Sales is 53.5% higher than the 2.39x industry average. CTRA’s D grade for Value reflects its overvaluation. CTRA has a 5.15x trailing-12-month EV/Sales, 115.3% higher than the 2.39x industry average.
Of the 100 stocks in the B-rated Energy - Oil & Gas industry, MRO is ranked #27, while CTRA is ranked #53.
Beyond what we have stated above, our POWR Ratings system has graded MRO and CTRA for Sentiment, Quality, Stability, and Growth. Get all MRO ratings here. Also, click here to see the additional POWR Ratings for CTRA.
The Winner
Given the rising energy prices amid an energy supply crunch and soaring demand, CTRA and MRO should benefit. However, a relatively lower valuation makes MRO a better buy now.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Energy - Oil & Gas industry.
CTRA shares were trading at $32.74 per share on Tuesday afternoon, up $0.37 (+1.14%). Year-to-date, CTRA has gained 79.83%, versus a -16.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
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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