Is PDC Energy Trading at a Premium?



PDC Energy’s EV to EBITDA

We’ve already looked at PDC Energy’s (PDCE) various operational and financial metrics in this series. Now we’ll analyze its valuation based on its EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiple.

EBITDA is an operating profitability metric. EV represents a company’s total value and is approximately a company’s market capitalization plus net debt.

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PDC Energy’s enterprise value

PDC Energy’s equity value has more than doubled since 2Q12, as its stock price increased by nearly the same magnitude. Revenues exhibited upward bias, while net income was volatile during this period.

Its EV has also gone up during that period. PDCE’s EV stood at $2.85 billion on September 22, 2015, against $1.32 billion at the end of 2Q12. PDCE’s net debt was $586 million by the end of 2Q12 compared to $663 million now.

PDC Energy’s 2Q15 EV-EBITDA

PDC Energy’s EV-to-trailing-12-month-EBITDA by the end of 2Q15 was ~21x. This is significantly higher than its three-year average historical multiple of ~14x.

This may look like PDCE is overvalued compared to its own historical valuations. But you should note that PDCE’s operating earnings have been negatively impacted by a fall in energy prices. It recorded a $49 million commodity risk management loss in 2Q15. So let’s have a look at its forward multiple.

PDC Energy’s forward EV-EBITDA

In a forward looking market, the forward EV-EBITDA multiple is a better measure compared to the historical EV-EBITDA multiple. Forward EV-EBITDA uses market expectations for a company’s EBITDA for the current fiscal year.

PDC Energy’s 2015 forward EV-EBITDA multiple is 6.6x. So the sharply lower forward multiple indicates that Wall Street expects PDCE’s EBITDA to improve sharply in 2H15 compared to 1H15. It also explains why PDCE is trading at an elevated multiple on a trailing basis.

In comparison, upstream energy company SM Energy (SM) is trading at a forward 2015 EV-EBITDA multiple of 4.25x, which is higher than its current EV-EBITDA multiple of 2.9x. PDCE is 0.16% of the Vanguard Energy ETF (VDE).


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