In the previous part, we compared Apache’s (APA) EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple against its historical levels. Now let’s compare the company’s valuation to its peers.
A peer group comparison shows that Apache’s forward EV-to-EBITDA multiple of ~7.8x is at a discount compared to its peers. Concho Resources (CXO) is currently trading at a forward EV-to-EBITDA multiple of ~11x. Continental Resources (CLR) is trading at a multiple of ~12x. Hess (HES) is trading at a multiple of ~9.4x. This means that APA is undervalued compared to its peers.
All these companies make up ~11% of the iShares US Oil & Gas Exploration & Production ETF (IEO).
APA’s valuation discount is likely the result of its debt. While it has reduced its debt significantly since last year, it still remains high. The Market associates that with high risk, especially when energy prices are volatile.
In 1Q16, APA’s debt-to-total capital ratio stood at 71%. This means that debt makes up a significant portion of the company’s capital structure. In comparison, CXO and HES have lower debt-to-capital ratios of 35% and 23%, respectively.
CLR has a debt-to-capital ratio of 62%. So APA’s lower valuation, coupled with high debt that’s being actively reduced, could make it attractive to both value investors and companies looking for acquisitions.
Returns and dividends
APA offers better returns when its profitability is scaled by shareholder equity. This is called ROE (return on equity). Apache’s ROE stands at about -3.1%, which is a result of the company’s negative net earnings.
Among Apache’s peers, Concho Resources has the worst ROE of -16%.
In terms of more direct returns to shareholders, APA offers a dividend yield of ~2%. Continental Resources and Concho Resources don’t offer dividend payments.