Why use the EV-to-EBITDA multiple?
Offshore drilling (XLE) (IYE) companies are best valued and compared using the EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple. A company’s forward EV-to-EBITDA multiple reflects what investors are willing to pay for the next four quarters of estimated EBITDA.
For the offshore drilling industry, we believe that the EV-to-EBITDA multiple reflects the perceived riskiness of investing in offshore drilling companies, as well as investors’ expectations for the industry’s outlook.
Seadrill Partners’ EV-to-EBITDA multiple
Seadrill Partners (SDLP) is currently trading at an EV-to-EBITDA multiple of ~4.3x, which is below its average of ~6.0x over the last year. Over the last year, Seadrill Partners’ multiple reached a high of 9.7x and a low of ~4.1x.
SDLP’s multiple has decreased from ~4.4x last month. Due to contract cancellations and a prevailing negative outlook for the offshore drilling market, its stock has fallen by 6% in the last month. On the other hand, its EBITDA estimates have increased in the past month.
Change in EBITDA estimates
Seadrill Partners’s current EBITDA estimate for 2016 stands at ~$1.0 billion. Analysts have increased this estimate by ~1.2% from ~$1.1 billion last month.