Is a bird in the hand really worth two in the bush?
It's a question that comes up a lot in investing, and right now, you could ask it about oil and gas drillers Apache (NASDAQ:APA) and Devon Energy (NYSE:DVN). Apache has a good outlook for later in the year, but middling performance right now, while Devon has bucked the trend and is one of the top performers in the industry. Let's dive in and see which is the better buy right now.
Luckily, both companies are similar in size, with market caps between $18 billion and $19 billion. Both also recently announced their first-quarter earnings for 2017, which gives us a great opportunity to compare how well each is doing.
Devon had a spectacular quarter. Oil production averaged 261,000 barrels/day, a 7% increase compared to Q4 2016. That exceeded the top end of the company's guidance range by 5,000 barrels/day. Operating cash flow increased by 54% over Q4 2016.
The company was also profitable, with $565 million, or $1.07 per share, in net GAAP earnings, compared to a loss of $3.06 billion, or $6.44 per share, in Q1 2016. Devon attributed some of this to cost-cutting moves. It was able to nearly halve its total operating expenses to $2.84 billion. All of this exceeded analysts' expectations and caused a stock bump.
Apache's first quarter, on the other hand, underwhelmed the market. The company has been devoting resources to building out infrastructure in its massive Alpine High play in the Delaware Basin of West Texas. And while those efforts are ahead of schedule, they're not expected to pay off until the second half of this year. The company did finally return to profitability with GAAP earnings of $213 million, or $0.56/share, but it is predicting a soft second quarter due to the infrastructure buildout, scheduled rig maintenance, and other issues.
So, even though Apache's prospects look rosy later in the year, Devon has established that it can perform well under current conditions, and thus is a better bet to replicate that performance in the future. .
While waiting for oil prices to rise, energy investors can take solace (and payouts) from a company's dividend. Luckily, both Apache and Devon pay one, but Devon's quarterly dividend was slashed in 2016, from $0.24/share to $0.06/share. Coupled with a slowly rising stock price, that means it currently yields less than 0.7%. And a dividend increase doesn't seem to be on the table. In fact, the word "dividend" wasn't even mentioned in the company's first-quarter earnings call...and believe me, I was listening for it!
Apache, on the other hand, currently yields just over 2%, which, while it doesn't compare to some of the integrated majors, is one of the best yields among exploration and production companies. With Apache devoting so many resources to Alpine High, though, further dividend increases seems unlikely.
So, although Apache may not raise its dividend this year, its current yield, coupled with the apparent lack of interest in raising the dividend over at Devon, makes it an easy winner in this category.
Like most oil and gas exploration and production companies, both Devon's and Apache's share prices have taken a hit since 2014. Naturally, if oil and gas prices recover, both stocks should pay off for investors. But many, including Apache's management, are predicting oil prices of around $50/barrel for the foreseeable future, so there's no telling when such a payoff might occur.
Because both Apache and Devon -- and, indeed, most oil and gas explorers and producers -- have been unprofitable for much of the last three years, it's tough to look at traditional earnings-based valuation metrics like PE ratios, because you can't calculate them when earnings are negative. Likewise, dividend yield -- sometimes a proxy metric -- is tough to compare when one company's dividend has been slashed and the other's hasn't. Return metrics like return on invested capital and return on capital employed show both companies working their way out of deep holes.
But let's just look at how the companies have performed relative to the industry at large over the past year:
Devon's shares have been outperforming the industry, while Apache's have underperformed by quite a bit. Currently, Apache's stock is trading at 52-week lows. That means you can now buy Apache -- with its Alpine High position -- for less than you could have last August, when nobody knew about the play's huge potential. This represents a rare chance for investors to "turn back the clock" and pick up shares on the cheap.
Despite Devon's stellar quarterly performance, Apache has a higher dividend yield and a better valuation, particularly when the company's Alpine High and other prospects for the second half of 2017 are factored in. The stock's recent beating provides investors with an excellent buying opportunity, especially if you can buy in at a price of less than $50/share. Apache wins the day.