Hess’s historical valuation
Hess’s (HES) EV-to-adjusted EBITDA (enterprise value to adjusted earnings before interest, tax, depreciation, and amortization) ratio was ~17.3x in 2Q16. Enterprise value is the sum of a company’s market capitalization and net debt.
Breaking down Hess’s valuation
Hess’s 2Q16 EV-to-EBITDA multiple was higher than its historical valuation multiple of ~7.9x. This means that HES was trading at a premium compared to its own historical multiples. The market value of Hess’s equity fell ~6.6% YoY (year-over-year), while its net debt fell from ~$5 billion in 2Q15 to ~$3.5 billion in 2Q16. The net result of this caused the company’s enterprise value to fall 0.5% in 2Q16 versus 2Q15.
On the other hand, the company’s trailing-12-month adjusted EBITDA fell 65% in 2Q16 over 2Q15, which explains its higher EV-to-EBITDA multiple in 2Q16.
The steady rise in Hess’s EV-to-EBITDA multiple between 3Q15 and 2Q16 was on account of its rapidly falling EBITDA in the period.
By comparison, upstream companies such as Continental Resources (CLR), Concho Resources (CXO), and Apache (APA) saw their 2Q16 EBITDAs for the trailing 12 months fall ~49%, 3%, and ~58%, respectively, compared to 2015. These companies make up 7.8% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
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 11x. This means that HES could continue to be overvalued compared to its historical levels, albeit far less extremely than in in the previous quarter.
Hess’s lower forward multiple also indicates that Wall Street expects its EBITDA to be higher this year compared to the last 12 months.