Denbury Resources’ relative valuation
Denbury Resources (DNR) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of ~13x, slightly lower than other bigger players such as Devon Energy (DVN) and Occidental Petroleum (OXY). These companies both have forward EV-to-EBITDA ratios of ~14x.
The above chart shows the different fundamental ratios for upstream companies with similar production mixes and overlapping geographical areas of operation.
EOG Resources (EOG), which operates in the unconventional resource space, has a forward EV-to-EBITDA ratio of ~18x. DNR’s forward EV-to-EBITDA of ~13x is much lower than that of EOG’s. When compared with smaller crude oil (USO) producer Energen (EGN), DNR’s forward EV-to-EBITDA is also lower. Energen has a forward EV-to-EBITDA ratio of ~16x.
DNR’s valuation appears to be at the lower end of the range compared to its peers’ valuations. The average EV-to-EBITDA ratio for the upstream industry is ~11.1x.
Even when compared using the price-to-book ratio, DNR appears to be at the lower end of the range at~1.27x. On a price-to-sale metric, DNR is much cheaper than its peers at ~1.21x
Is DNR’s multiple justified?
Typically companies with low leverages or high current ratios trade at premiums to their book values or have higher price-to-sales ratios. A possible explanation for this could be the fear of an energy-driven debt crisis if commodity prices stay low or fall for much longer than anticipated.
In 1Q16, DNR had the highest debt-to-equity ratio among its peers at ~301%. Also in 1Q16, DNR had the lowest current ratio of ~0.84x. Given its high debt, much higher leverage, and lower current ratio, DNR’s stock’s trading at lower multiples is justified.