Comparable company analysis
As the chart below shows, among Halcon Resources’ (HK) peers listed, Rosetta Resources (ROSE) and EXCO Resources (XCO) are the largest and the smallest company by market capitalization and enterprise value (or EV), respectively.
XCO has the highest EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, 7.6x, here. ROSE has the lowest EV (approximately the summation of its equity value and net debt) when scaled by EBITDA in the group at 6.2x.
Analysts’ consensus forward EV/EBITDA multiple is the lowest for ROSE in 2014, while HK’s projected EV/EBITDA multiple, 5.6x, is also one of the lowest in the group. Forward EV/EBITDA is a useful metric to gauge relative valuation.
A lower forward multiple compared to the present ratio typically indicates expectations of strong EBITDA growth for the period. HK is a component of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
HK’s net-debt-to-EBITDA multiple, 4.5x, is the highest in the group average, along with XCO’s. A higher multiple indicates a potential liquidity crunch, or insufficient cash to repay debt.
XCO’s debt-to-equity multiple at ~12x is significantly higher than its peers, while HK’s financial leverage at 2.2x is on the higher side compared to peer average. A higher debt to equity ratio indicates increased risk associated with the management of debt levels.
Price to earnings ratio (PE)
HK’s last 12 month (or LTM) PE multiple is not available because the company incurred net loss. However, for the full year 2014, HK’s forward PE at 32.7x is in line with the peer average, reflecting analyst expectations of profits this year.
XCO’s 2014 forward P/E is the highest at 83.4x. Forward PE considers the sell-side analysts’ consensus estimate of earnings for the year.
Although HK’s quality of earnings, as measured by profit margin and return on equity, is among the weakest in the group, its asset turnover ratio, projected earnings growth, and solid oil and gas production rates are in line with its peers. None of the companies in the group except XCO pay dividends, as these companies invest heavily towards growth.
HK’s estimated EPS growth rate is at ~29%. XCO’s estimated EPS growth is the lowest at just 2%.
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