Hess’s historical valuation
Hess Corporation’s (HES) EV-to-adjusted EBITDA (enterprise value to adjusted earnings before interest, tax, depreciation, and amortization) ratio was ~14.3x in 1Q16. Enterprise value is the sum of a company’s market capitalization and net debt.
Breaking down Hess’s valuation
Hess’s 1Q16 EV-to-EBITDA multiple was higher than its historical valuation multiple of ~7.8x. This means that HES was trading at a premium compared to its own historical multiples. The market value of Hess’s equity fell by ~23% YoY (year-over-year), while its net debt fell from ~$4.5 billion in 1Q15 to ~$3 billion in 1Q16.
However, the company’s trailing-12-month adjusted EBITDA fell by 53% in 1Q16 over 1Q15, which explains its higher EV-to-EBITDA multiple in 1Q16.
The steady rise in Hess’s EV-to-EBITDA multiple between 2Q15 and 1Q16 was on account of its falling EBITDA in the period.
By comparison, upstream companies such as Continental Resources (CLR) and Apache (APA) saw their respective 1Q16 EBITDAs for the trailing 12 months fall by ~48.5% and ~61%, respectively, compared to 2015.
What does Hess’s forward EV-to-EBITDA tell us?
The forward EV-to-EBITDA multiple uses market expectations for a company’s EBITDA for the current year. Hess’s forward EV-to-EBITDA multiple is 8.8x. This means that HES could continue to be overvalued compared to its historical levels, albeit far less extremely than in in the last few quarters.
Hess’s lower forward multiple also indicates that Wall Street expects its EBITDA to be higher this year compared to the last 12 months.