The Better Buy in Oil & Gas

By Chad Henage - May 14, 2012 | Tickers: MVO, PSE | 0 Comments

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With the market recently hitting a rough patch, these are the times to look for bargains in sectors that you aren't invested in. With this in mind, I ran a screen on The Motley Fool CAPS Screener for energy companies with at least a 2% yield, 10% or better past EPS growth, and a CAPS rating of at least 4 stars. Of the companies this screen returned, two looked promising, MV Oil Trust (NYSE: MVO) and Pioneer Southwest Energy (NYSE: PSE). Both companies operate in the oil and natural gas field and both pay good dividends, but which one is better? That's what we're here to find out.

It appears that MV Oil is the better deal right now. Though the company has a slightly higher P/E ratio, the company's higher expected growth rate offers a better combination than Pioneer. (MV Oil – 2, Pioneer – 1)

If a company is expected to meet future growth expectations, it would be nice to see them meet or exceed prior earnings. Companies that can meet or exceed earnings expectations on a regular basis are usually more highly valued. In this category, only MV Oil can claim to have beaten expectations on average this last year. MV Oil beat expectations in two of the last four quarters, with an average beat of 11.23%. Pioneer on the other hand, missed expectations in three of the last four quarters, and missed expectations on average by 2.7%. (MV Oil – 2, Pioneer – 1)

While earnings are important, cash flow is what pays the bills. Comparing the two companies operating cash flow should show us which company is the more efficient operator. The best way to compare the two is by looking at which company generates more cash flow per $1 of assets. MV Oil generated $0.30 in operating cash flow per $1 of assets, versus Pioneer generated $0.36 in operating cash flow in the last year. With Pioneer generating more cash flow per the same $1 of assets, Pioneer wins this category. (MV Oil – 1, Pioneer – 2)

Speaking of cash flow, this is what pays the company's dividends. Since many investors are buying these stocks due to their large distributions, it makes sense to look at the size, sustainability, and growth in their payouts. Look at the two side-by-side:

It's not unusual to find companies in the oil and gas field with a high payout ratio. In the case of MV Oil, the company's structure demands a high payout ratio. MV Oil pays a variable dividend where net income minus expenses determines the payout. Where Pioneer is concerned, the company is paying out more than it's free cash flow, however it's likely this is because the company wants to reward shareholders in anticipation of future gains from further production. To really find out which company is better positioned, we need to look at the companies balance sheets. For now, the higher yield, lower payout, and better growth rate favors MV Oil. (MV Oil – 2, Pioneer – 1)

When it comes to the two company's balance sheets, this is a very close race. MV Oil essentially only pays out in distributions what it can, so the company doesn't take on debt. If they make $9 million, they subtract expenses and then pay out the difference. Where Pioneer is concerned, they are paying out a little more than their free cash flow, but their debt level is very low as well. Pioneer shows a debt-to-equity ratio of just 0.14. Because of the way MV Oil is structured, this setup gives some variability to the dividend, but assures investors that the company won't go deep into debt to pay for dividends that can't be sustained. On the dividend side this is somewhat a negative for investors, but it favors MV Oil's balance sheet. (MV Oil – 2, Pioneer – 1)

The totals are MV Oil – 9 and Pioneer – 6. This is a landslide victory for MV Oil. If there is any problem for MV Oil shareholders, it's that their dividend is somewhat variable. If the company is able to meet earnings expectations of 7% growth, in theory dividends would grow at a slightly slower pace. I think it's reasonable to expect 5% dividend growth. With a yield already north of 10% and the potential for growth, that is a great combination for yield hungry investors.

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