In the highly competitive oil and gas industry, some of the companie stand out for their scale and geographical reach. In this article, I will analyze three of the main players in the arena, Exxon Mobil Corporation (NYSE:XOM), Pioneer Natural Resources (NYSE:PXD), and Apache Corporation (NYSE:APA), in order to elucidate which giant offers the best investment prospects:
A bright energy play
Oil and natural gas company Pioneer Natural Resources (NYSE:PXD) established its dominance in the Permian sector during the late 90´s. Onshore oil exploitation has been central to improving the firm´s relative positioning. Despite several encouraging indicators, many analysts recommend “Hold” on this stock.
On the bright side, the company sits on a low risk and high margin inventory that is worth a decade, at least, as the firm controls 900,000 acres of land in the Permian Basin. This provides an interesting set of repeatable high profit vertical and horizontal opportunities, important to support short-term production increases and provide a stable and reliable cash flow source for long-term investments.
The company’s main Permian asset is Spraberry, located in the Midland Basin, which has been intensely increasing its production over the past few years, reaching the highest cumulative production in the U.S. (Alaska excluded).
In addition, Pioneer Natural Resources (NYSE:PXD) has succeeded in reaching greater drilling depths in the Strawn, Atoka, and Mississippian during 2012, and will continue to deepen most of its wells during the next year or two, generating more reserves to add to the already sizable Spraberry inventory.
Although the firm´s key asset is vertical drilling, the incursion in horizontal drilling in the Wolfcamp Shale (in the context of a $1.7 billion joint venture with Sinochem) provides plenty of opportunities to speed up production since it should support higher growth rates at similar returns.
On the other side, independent drilling has several risks that have resulted in decreasing operating income over the past three years. Furthermore, the company´s debt raises even more eyebrows, as it has issued over $880 million in debt over the past three years, resulting in a worrying cash to debt ratio of 0.062. This result places Pioneer Natural Resources (NYSE:PXD) below the industry median of 0.1 in the U.S. and 1.8 globally.
Although the company offers some upside, currently trading at a 73.6x P/E, significantly above the U.S. Oil and Gas E&P industry median of 5.2x, my recommendation, despite a majority of Barrons’ analysts recommend to buy, is a hold.
Another option in the energy sector
Just like in Pioneer Natural Resources (NYSE:PXD)’s case, analysts tend to recommend holding Apache Corporation (NYSE:APA). Even though the company offers a diversified reserve base, geographically speaking, and plenty of opportunities to grow, upside on stock is limited, mainly due to the firm’s “sensitivity to gas/oil price volatility, its drilling results, costs, geo-political risks and project timing delays.” (Zacks)
Apache delivered solid results in the previous quarter (Q4 2012), witnessing a 5% upsurge in production. Several acquisitions – including the $4 billion merger with Mariner Energy; asset procurements for $11 billion from BP plc (ADR) (NYSE:BP), Devon Energy Corp (NYSE:DVN) and Exxon Mobil Corporation (NYSE:XOM); and a $3 billion “built-to-sell” purchase from a private firm — should boost production further in the short-term and provide plenty of exploration opportunities in the long run.
Apache’s diversified portfolio contains mature assets, which provide an ongoing source of funding, and several exploration and development projects which encourage an optimistic view for some analysts (Morningstar). Financial ratios complement the upside: while a dividend yield of 1.01% is at one of its highest points in ten years, the case is opposite for P/B and P/S ratios of 0.9 and 1.61, respectively.
Despite the upside, some concerns related to the firm´s finances raise stockholders´ eyebrows. For starters, the annual asset growth rate of 25.7% is substantially higher than the five year average annual revenue growth rate of 9.3%, building up serious concerns regarding the company´s efficiency.
Related to this last matter, cash flow from operations differs considerably from reported net income. This reinforces the suspicions related to Apache´s lack of efficiency, as this divergence suggests that the company is not being able to collect debt from its clients, or that other activities, not considered in the financial statements, are resulting in cash flow problems.
The big cap energy leader
The company’s scale and integration make it a world leader, and provides it with plenty of growth opportunities as the economy recovers. Several planned investments should drive the production to higher growth rates, while its financial health and high credit rating (AAA) help maintain the strong free cash flow generation to fund this development. Moreover, the joint venture in Siberia with Rosneft is expected to deliver about 36 billion barrels of oil reserves, which would help increase Exxon Mobil Corporation (NYSE:XOM)’s future earnings further.
