Is Diamondback Energy Trading at a Lower Premium after Brexit?



Diamondback Energy’s current enterprise multiple

On June 24, 2016, Diamondback Energy’s (FANG) EV-to-adjusted EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] ratio was ~16x. This equals the company’s historical average EV-to-EBITDA ratio of ~16x during the past 11 quarters.

The EV-to-EBITDA ratio is also referred to as an enterprise multiple. It is preferred over the PE (price-to-earnings) ratio, especially for upstream companies, because it takes a company’s debt into account. In the enterprise multiple, enterprise value is the sum of a company’s market capitalization and the market value of debt, minus total cash and cash equivalents.

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Diamondback Energy’s forward enterprise multiple

In the weeks leading to the Brexit referendum, Diamondback Energy (FANG) traded at its lifetime high of $96.01. However, the Brexit outcome saw the company’s stock fall to $87.28.

The price sell-off also translated to the decline in the premium on its forward EV-to-EBITDA. After the Brexit outcome, Diamondback Energy was trading at a forward enterprise multiple of ~23x. This is lower than FANG’s pre-Brexit forward enterprise multiple of ~25x.

For 2016, Wall Street analysts estimate that FANG’s EBITDA will be ~$281 million, or lower by ~44% YoY (year-over-year). Among the other upstream companies, Wall Street analysts also expect Denbury Resources (DNR), Devon Energy (DVN), and Encana (ECA) to post ~64%, ~60%, and ~48% lower YoY EBITDA figures, respectively, in 2016.

The Energy Select Sector SPDR ETF (XLE) generally invests at least 95% of its total assets in oil and gas companies.


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