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Weighing Anadarko Petroleum’s Valuation against Peers

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Apr. 15 2016, Updated 3:04 p.m. ET

Anadarko’s relative valuation

In the previous part of this series, we compared Anadarko Petroleum’s (APC) 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.

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APC’s forward EV-to-EBITDA

A peer group comparison shows that Anadarko’s forward EV-to-EBITDA multiple of ~8.5x is lower than that of its peers. ConocoPhillips (COP) is currently trading at a forward EV-to-EBITDA multiple of ~9.3x. Occidental Petroleum (OXY) is trading at a multiple of ~11X. Pioneer Natural Resources (PXD) is trading at a higher EV-to-EBITDA multiple of ~14.2x. Therefore, APC appears to be undervalued compared to its peers.

Together, these companies make up ~10% of the Guggenheim S&P 500 Equal Weight Energy ETF (RYE).

Why is APC trading at a discount?

APC’s EBITDA has fallen considerably this year, and so have its cash flows. Its net debt levels are also higher than they were last year. If the current oil price recovery doesn’t sustain, the company’s cash flows might be in trouble, and APC might have to resort to raising more debt or share sales—or even cut its dividend altogether to conserve cash. In any case, APC’s low forward EV-to-EBITDA multiple compared to peers implies a valuation discount, primarily due to higher risk.

Anadarko’s returns and dividends

In terms of returns, APC offers the worst returns when its profitability is scaled by its shareholder equity. This calculation is called ROE (return on equity). APC’s ROE stands at around -41%, which comes as a result of the company’s negative net earnings or net loss. Among the company’s peers, PXD has the best ROE at nearly -3.3%.

In terms of more direct returns to shareholders, APC offers a dividend yield (dividends divided by share price) of ~0.4%—one of the lowest in its peer group.

In the next and final part, we’ll analyze the relationship between Anadarko’s stock price movement and the current crude oil environment.

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