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Understanding Apache’s Historical Valuation

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Apache’s historical valuation

Apache’s (APA) EV-to-adjusted EBITDA (enterprise value to adjusted earnings before interest, tax, depreciation, and amortization) ratio was ~12x in 2Q16. Enterprise value is the sum of a company’s market capitalization and net debt.

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Breaking down Apache’s valuation

Apache’s 2Q16 EV-to-EBITDA multiple was higher than its historical valuation multiple of ~6.6x. This means that APA was trading at a premium compared to its historical multiples. The market value of Apache’s equity rose ~60% YoY (year-over-year), while its net debt fell from ~$6.7 billion in 2Q15 to ~$7.5 billion in 2Q16. The net result of this caused the company’s enterprise value to fall 1.7% in 2Q16 versus 2Q15.

On the other hand, the company’s trailing-12-month adjusted EBITDA fell 58% in 2Q16 over 2Q15, which explains its higher EV-to-EBITDA multiple in 2Q16.

By comparison, upstream companies such as Continental Resources (CLR), Concho Resources (CXO), and Hess (HES) saw their 2Q16 EBITDAs for the trailing 12 months fall ~49%, 3%, and ~65%, respectively, compared to 2015. These companies make up 7.8% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

What does Apache’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. Apache’s forward EV-to-EBITDA multiple is 8.6x. This means that APA could continue to be overvalued compared to its historical levels, albeit far less extremely than in the previous quarter.

Apache’s lower forward multiple also indicates that Wall Street expects its EBITDA to be higher this year compared to the last 12 months.

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