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Analyzing Southwestern Energy’s Enterprise Multiple

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Valuation metric

The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio is used to determine the value of a company. This ratio is also called an enterprise multiple and is preferred over PE ratio, especially for upstream companies, because it takes into account the debt of a company. In the enterprise multiple, enterprise value is the summation of market capitalization and market value of debt minus total cash and cash equivalents (investments).

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Southwestern Energy’s enterprise multiple

The above chart shows Southwestern Energy’s enterprise multiple (EV-to-EBITDA) for the last five years. In 3Q15, SWN’s enterprise value stood at $11.3 billion, whereas the company reported a negative EBITDA of -$2.5 billion in the same period. As noted in part six of this series, the negative EBITDA is the direct result of a steep fall in natural gas and natural gas liquids prices as well as a non-cash ceiling test impairment of natural gas and oil properties of $2.8 billion (or $1.7 billion net of taxes). The trailing-12-month EBITDA is negative due to a huge 3Q15 loss, and the EV-to-EBITDA ratio cannot be calculated.

But, as noted in part six of this series, the adjusted trailing-12-month EBITDA excluding one-time non-recurring charges for the last 12 months comes in around ~$1,631 million. With this adjusted trailing-12-month EBITDA, SWN’s enterprise multiple comes in around ~7.0x. This enterprise multiple is shown in green in the above chart, and it is within the historical range. It is important to note that even though the EBITDA fell, enterprise value also fell due to reduced market capitalization, which maintained the company’s enterprise valuation at historical levels.

Other upstream companies within the S&P 500 (SPY) like Range Resources (RRC), EQT (EQT), and Pioneer Natural Resources (PXD) have enterprise valuations of ~11x, 12x, and 10x, respectively.

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Forward enterprise multiple

SWN’s forward EV-to-EBITDA multiple is 6.0x, which is also closer to the historical average. The lower forward multiple indicates that Wall Street analysts expect SWN’s EBITDA to be higher this fiscal year compared to the last 12 months.

SWN’s proved reserves

Proved reserves are an important metric when considering an upstream energy company’s valuation. They determine the volumes that an oil and gas company can recover in the future.

As of December 31, 2014, SWN had natural gas net proved reserves of 9,809 billion cubic feet, natural gas liquids proved reserves of 118.7 million barrels, and crude oil reserves of 37.6 million barrels. Combined, the total net reserves of SWN stood at 10,747 billion cubic feet equivalent. SWN’s total proved undeveloped reserves were approximately 45% of its total proved reserves on December 31, 2014.

According to SWN’s 10-K filing, the discounted value of its reserve base at the end of 2014 was $7.5 billion. Given the decline in commodity prices in 2015, this value will be much lower today. During the first nine months of 2015, SWN took $4.4 billion in non-cash ceiling test impairment charges due to lower commodity prices.

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