At 4/25, SWN’s enterprise value is ~$14.3 billion and its 2013 expected EBITDA is $1.9 billion (based on 2013 consensus estimates), therefore the company is trading at roughly 7.5x EBITDA. Assuming this multiple stays constant with changes in natural gas prices and SWN’s EBITDA, every ~$100 million change in expected yearly EBITDA should cause SWN’s enterprise value to move by ~$750 million. Investors should note however that the market analyzes more than just EV/EBITDA when valuing companies, and there’s no way to assure that this equation will hold. We simply use it to demonstrate theoretically what could happen with a move in gas prices.
Below are several gas weighted companies with 4Q12 production and 2012 year end reserves shown.
Below is the correlation (using weekly returns for the past 52 weeks) between several natural gas weighted companies to each other, the natural gas front month contract, the WTI crude oil front month contract, and the S&P500.
Note that some companies, such as CHK appear to have low or possibly negative correlation to natural gas prices. Chesapeake in particular had idiosyncratic events which affected how the stock traded last year, possibly causing it to trade out of line with natural gas. However, this does not mean that CHK is actually negatively correlated with natural gas prices. Given that the majority of its assets and production are natural gas, the company should benefit from a lift in prices.
The below graphs show the performance of several natural gas weighted stocks versus the front month natural gas contract from the beginning of 2013 on a percentage change basis.
Observe that while the equities do not trade in lock step with natural gas prices as the ETFs do, they generally trade in line with natural gas.
continue to “How to invest in natural gas (part VIII)”
© 2013 Market Realist, Inc.