California Resources’ relative valuation
The table below shows different fundamental ratios for upstream companies with similar production mixes and overlapping operating areas.
California Resources (CRC) has forward EV-to-EBITDA ratio of ~13x, which is higher than smaller players like Bonanza Creek Energy (BCEI). Bonanza Creek Energy has forward EV-to-EBITDA ratios of ~9x. Encana (ECA) and Consol Energy (CNX), which operates in the unconventional resource space, have forward EV-to-EBITDA ratios of ~10x and ~11x, respectively. CRC’s forward EV-to-EBITDA ratio of ~13x is higher than these companies’.
Compared with EOR (enhanced oil recovery) companies like Denbury Resources (DNR), CRC’s forward EV-to-EBITDA ratio is almost same. DNR has forward EV-to-EBITDA ratio of ~13x.
So California Resources’ forward enterprise multiple appears to be on the higher side compared to peers.
California Resources’ price-to-sales and price-to-book multiples
But compared with the price-to-sales metric, CRC appears to be the cheapest, with a multiple of only ~0.22x. As for its price-to-book ratio, CRC has a negative book value of about -$1.1 billion, so this ratio can’t be calculated.
Is California Resources’ higher forward enterprise multiple justified?
Typically, companies with lower leverage or higher current ratios trade at higher enterprise multiples. One possible explanation could be the fear of an energy-driven debt crisis if commodity prices stay low or fall further for much longer than anticipated.
- As of 2Q16, CRC has negative shareholder equity of about -$1.1 billion.
- As of 2Q16, CRC has a lower current ratio of ~0.65x.
Plus, as we saw in Part 5 of this series, California Resources has a much higher net debt-to-adjusted EBITDA ratio of ~7x. Add to this ratio CRC’s inability to produce a positive cash flow in 2Q16 despite improved energy prices.
Given California Resources’ negative book value, lower current ratio, high debt, and lower margins, CRC—trading with a forward EV-to-EBITDA ratio of ~13x—is expensive compared to peers.