Devon’s relative valuation
In the previous part of this series, we compared Devon’s (DVN) EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple against its own historical levels. In this part, we’ll look at the company’s valuation against the multiples of its peers.
Devon’s forward EV-to-EBITDA
A peer group comparison shows that Devon’s forward EV-to-EBITDA multiple of ~5.2x is lower than those of its peers. For example, Marathon Oil (MRO) is currently trading at a forward EV-to-EBITDA multiple of ~7x. EQT (EQT) is trading at a multiple of ~8.6x, while Cabot Oil and Gas (COG) is trading at a higher multiple of 10.3x. Canadian company Encana (ECA) has the highest EV-to-EBITDA multiple of 13.6x. So DVN appears to be undervalued compared to its peers. Together, these companies (excluding ECA) make up ~5% of the Energy Select Sector SPDR ETF (XLE).
Why is DVN trading at a discount?
As we saw in the previous parts, DVN’s EBITDA has declined considerably this year. This is not new for upstream companies given the current energy price environment. However, in this turbulent price environment, DVN is seen to be making acquisitions (read Part 3) and rolling off hedges in 2016 (read Part 5). As we saw in Part 6, DVN’s leverage has also been rising. So DVN’s lower forward EV-to-EBITDA multiple compared to its peers implies a valuation discount due to higher risk.
Devon’s returns and dividends
In terms of returns, Devon offers the lowest returns when its profitability is scaled by its shareholder equity. This calculation is called ROE (return on equity). DVN’s ROE stands at -61%. Among the company’s peers, EQT has the highest ROE at ~4.3%
In terms of more direct returns to shareholders, DVN offers one of the lower returns, with a dividend yield (dividends divided by share price) of ~3.3%. MRO has the highest dividend yield of ~7%.
In the next part, we’ll look at Devon’s stock drivers.