Where Do Integrated Energy Stocks’ Valuations Stand after 3Q17?
Integrated energy stocks’ valuations
Previously, we looked at integrated energy stocks’ institutional ownership changes. In this part, we will compare forward valuations of integrated energy stocks ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP).
The forward EV-to-EBITDA1 and price-to-earnings (or PE) multiples of these companies stand at 7.0x and 20.3x, respectively.
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XOM trades at a forward EV-to-EBITDA multiple of 8.6x and a forward price-to-earnings multiple of 20.8x—both higher than the peer averages. Likewise, CVX trades above the peer averages on both parameters. However, Shell and BP trade below their peer averages on both valuation ratios.
Premium and discount valuations
The premium valuations that XOM and CVX command are presumably as a result of the lower debt in their capital structure compared to Shell and BP.
XOM, CVX, Shell, and BP have seen a sharp rise in their debt levels in the past few years due to unstable oil prices. Plus, BP (BP) had been hammered by the Gulf of Mexico oil spill expenses. Shell’s acquisition of the BG Group led to a steep rise in its debt.
Reviewing the total-debt-to-total capital ratio in 3Q17, ExxonMobil (XOM) had the lowest ratio at 18.0%, and Chevron’s ratio was 22.0%. Shell’s and BP’s leverage ratios stood at 31.0% and 40.0%, respectively, in 3Q17.
XOM and CVX have less debt in their capital structures compared to Shell and BP, placing CVX and XOM in a relatively comfortable leverage position. In our view, the higher leverage is weighing on Shell and BP, pushing their valuations below the peer average.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩