Comparable company analysis
As the table below shows, Schlumberger (SLB) is the largest company by market capitalization among our set of select OFS (oilfield services and equipment) companies. Core Laboratories (CLB) is the smallest of the lot by market capitalization.
The table also shows that Halliburton’s (HAL) EV (enterprise value, or the approximate summation of equity value and net debt), when scaled by TTM (trailing twelve months) adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is lower than the peer group average. Adjusted EBITDA excludes extraordinary charges like acquisition related costs and asset impairments, which we discuss elsewhere in this series. Core Laboratories has the highest TTM EV-to-EBITDA multiple in our group. Notably, Halliburton makes up 2.9% of the Energy Select Sector SPDR ETF (XLE).
To be clear, forward EV-to-EBITDA is a useful metric for gauging relative valuation. HAL’s forward EV-to-EBITDA multiple expansion compared to its adjusted TTM EV-to-EBITDA is higher than the peer average in our group. This is because the expected drop in HAL’s adjusted operating earnings or EBITDA in fiscal 2016 is more extreme than that of peers. This also explains HAL’s low current EV-to-EBITDA multiple.
We should note that Halliburton’s net-debt-to-EBITDA multiple is higher than the group average. A higher multiple could indicate insufficient cash to repay debt, and this is a particular concern when crude oil prices are falling. Cameron International’s (CAM) net-debt-to-EBITDA ratio is the lowest in our group. (For a comparative analysis of the top OFS companies, check out Market Realist’s series Which Oilfield Service Companies Can Break the Jinx?)
We should also note that Halliburton’s valuation, which is here expressed as TTM PE (price-to-earnings) multiple of 23x, is lower than the peer average in our group. The forward PE multiple expansion reflects the more extreme earnings decline compared to peers, which is typically reflected in a company’s current valuation discount over the peer average. In any case, analysts expect a healthy 11% earnings growth for Halliburton in the next three to five years—an estimate that could boost HAL’s valuation in the medium-to-long term.