EOG Resources’ relative valuation
The following table shows several fundamental ratios for S&P 500 (SPY) upstream companies that have a similar production mix and have overlapping geographical areas of operations.
EOG Resources (EOG) has a forward EV-to-EBITDA ratio of ~11x, which is slightly higher when compared with other big players like Occidental Petroleum (OXY) and Pioneer Natural Resources (PXD). These companies have forward EV-to-EBITDA ratios of 9x and 10x, respectively.
Murphy Oil Corporation (MUR) and Noble Energy (NBL), which have considerable presence in offshore locations, have much lower EV-to-EBITDA of 4x and 7x, respectively. EOG’s valuation appears to be at the higher end when compared with its peers. The average EV-to-EBITDA ratio for the upstream industry is ~12.2x.
Even when compared with the price-to-book metric, EOG appears more expensive at ~2.7x. On its price-to-sales metric, EOG is in the middle of the range at ~3.46x.
Why is EOG trading at a premium?
From the above table, one trend is clear—companies with higher leverage or lower current ratios are trading at a discount to their book value, or they have a lower price to sales. A possible explanation could be a fear of an energy-driven debt crisis if commodity prices stay low, or move further down, for much longer than anticipated.
Given a path of rising interest rates at a time when energy companies are so indebted and are scrambling for access to capital, interest expenses for highly leveraged companies can rise further.
As of 3Q15, EOG has a debt-to-equity ratio of ~49% and a current ratio of ~1.38, both in the middle of their respective ranges. So, it is trading at a higher premium to its peers.