A Comparative Valuation of Four Representative OFS Mid-Caps in 2Q16


Jul. 12 2016, Updated 12:04 p.m. ET

Company analysis

As you can see in the table below, Core Laboratories (CLB) is the largest company of our select four OFS (oilfield services and equipment) companies by market capitalization. Dril-Quip, Inc. (DRQ) is the smallest of the lot by market capitalization.

Dril-Quip’s (DRQ) EV (enterprise value, or the approximate sum of its equity value and net debt), when scaled by TTM (trailing-twelve-month) adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is the lowest in our group. RPC, Inc. (RES) has the highest TTM EV-to-EBITDA multiple in the group.

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Forward EV-to-EBITDA is a useful metric for gauging relative valuation. DRQ’s forward EV-to-EBITDA multiple expansion versus its adjusted TTM EV-to-EBITDA is the highest in the group. This is because the expected drop in DRQ’s adjusted operating earnings, or EBITDA, in 2016 is more extreme than those of peers. This also explains DRQ’s low current EV-to-EBITDA multiple.

Debt levels

WFT’s debt-to-equity multiple is higher than the group average. A higher multiple could indicate increased credit riskiness, and this is concerning when crude oil prices are volatile. RES and DRQ, on the other hand, have no debt. (Read Market Realists’ series Which Oilfield Service Companies Are in Danger of Bankruptcy? for more on this.)

Notably, DRQ makes up 0.3% of the iShares S&P Mid-Cap 400 Value ETF (IJJ). The energy sector makes up 7% of IJJ.

PE ratio

DRQ’s valuation expressed as TTM PE (price-to-earnings) multiple of 13.0x is the lowest in the group. Its forward PE multiple expansion reflects a more extreme earnings decline compared to peers, which typically results in a current valuation discount over the peer average. Analysts expect Weatherford International and RPC, Inc. to post negative earnings for the next four quarters.

In the next part, we’ll look at the correlation between crude oil prices and these company’s stock prices.


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