How Do CXO and CHK Compare on Relative Valuation?



Market capitalization and enterprise value

Concho Resources (CXO) is larger than Chesapeake Energy (CHK) in terms of market capitalization. However, the two are similar when it comes to EV (enterprise value), which takes into account equity value and net debt. As we saw in part one of this series, CHK has net debt of ~$10 billion, while CXO has net debt of ~$3 billion. Thus, CHK’s EV is significantly affected by debt.

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Forward EV-to-EBITDA multiple

The forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a useful metric to gauge relative valuation. Given that CXO is a crude oil–heavy producer and CHK is a natural gas–heavy producer, we have compared the metrics in the above table with their respective peer groups. Hess (HES) and Apache (APA) serve as CXO’s crude oil–heavy peers, while Gulfport Energy (GPOR) and Rice Energy (RICE) serve as CHK’s natural gas–heavy peers. All these companies combined make up ~12% of the iShares U.S. Oil & Gas Exploration & Production ETF (IEO).

CXO is trading at a premium to its close competitors. This premium is based on its capital and cost efficiencies, a strong balance sheet, and lower risk. CHK, on the other hand, is trading at a discount to its peers due to higher debt, which translates to higher risk.

Debt comparison

CXO’s debt-to-equity multiple is one of the lowest in the group of companies we’ve been discussing. CHK’s debt-to-equity ratio, on the other hand, is the highest in the group. A higher debt-to-equity ratio usually indicates higher risk, as it indicates that a company has been aggressively financing its growth through debt.

In the final part of this series, we’ll see how commodity prices are affecting Concho Resources and Chesapeake Energy.


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