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Relative Valuation: Noble Energy versus Its Peers

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Jan. 26 2016, Updated 7:12 a.m. ET

Noble Energy’s relative valuation

The average EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio for the upstream industry is ~12.2x. With ~8x, Noble Energy (NBL) has a higher forward EV/EBITDA ratio than offshore player Murphy Oil (MUR), which has a ratio of ~4x. However, when compared with Cimarex Energy (XEC), which has a forward EV/EBITDA ratio of ~11, Noble Energy’s valuation appears to be cheaper. Occidental Petroleum (OXY) and Pioneer Natural Resources (PXD) have forward EV/EBITDA ratios of 9x and 10x, respectively, which are also higher than Noble Energy’s. Therefore, Noble Energy’s valuation appears to be at the lower end in its peer group.

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The table above shows fundamental ratios for S&P 500 (SPY) upstream companies that share similar production mixes and geographical areas of operation with Noble Energy. Even when compared based on the price-to-book value ratio, Noble Energy appears much cheaper with a ratio of ~1.1x. Based on the price-to-sales ratio, with a ratio of ~4.3x, the company is midrange within its peer group.

Why is Noble Energy trading at a discount?

Companies with higher leverage or lower current ratios are trading at discounts to their book values or have lower price-to-sales ratios. One possible explanation for this could be fear of an energy-driven debt crisis if commodity prices stay low for much longer than anticipated. Also, given the rising interest rates at a time when energy companies are so indebted and scrambling for access to capital, interest expenses for highly leveraged companies could rise further.

As of 3Q15, within its peer group, Noble Energy has a high debt-to-equity ratio, with ~65%, and a low current ratio, with ~1.2. Therefore, it’s trading at a discount to its peers.

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