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Analyzing Relative Valuations: EOG, CHK, APA, and SWN

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Relative valuations

In this final part of the series, we will analyze the relative valuations of the companies that we have been discussing in this series. We will explore the reasons for their higher or lower forward EV-to-EBITDA valuations.

EOG Resources (EOG) has a forward EV-to-EBITDA ratio of ~18x, which is the highest among its peers—Chesapeake Energy (CHK), Apache Corporation (APA), and Southwestern Energy (SWN). These companies have forward EV-to-EBITDA ratios of ~15x, ~11x, and ~14x, respectively. Apache Corporation’s forward valuation appears to be the least expensive among the companies in this series. Even when compared on a price-to-sales metric, EOG appears to be more expensive with a reading of ~4.72x.

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The average EV-to-EBITDA ratio for the upstream industry is ~12.2x. The SPDR S&P Oil and Gas Exploration & Production ETF (XOP) generally invests at least 80% of its total assets in oil and gas exploration companies, whereas the First Trust ISE-Revere Natural Gas ETF (FCG) invests in natural gas producers.

Why is EOG trading at a premium?

When looking at 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 ratio. 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. Also 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 4Q15, EOG has a debt-to-equity ratio of ~51%, which is the lowest among the companies in this series. This is one of the main reasons it is trading at a premium.

Why are CHK and APA trading at a discount?

As of 4Q15, Chesapeake Energy (CHK) has a debt-to-equity ratio of ~449%, which is the highest among the companies in this series. This clearly shows why it is trading at a steep discount. Its price-to-sales ratio is only ~0.22x.

Apache Corporation (APA) also has a higher debt-to-equity ratio of ~208%. It is trading at a forward EV-to-EBITDA ratio of ~11x.

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