Bill Barrett’s historical valuations
Bill Barrett’s (BBG) 3Q16 adjusted EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio was 11.2x. EV is the sum of a company’s market capitalization and net debt.
Breaking down BBG’s valuation
Bill Barrett’s 3Q16 EV-to-EBITDA multiple is in line with its historical average multiple of ~11.3x. Thus, BBG is trading at par with its own historical multiples. The market value of BBG’s equity has risen ~78% since the end of 2015. Its net debt fell from ~$666 million in 4Q15 to ~$537 million in 3Q16, as we saw in part one of this series. So, BBG’s EV rose 8.1% in this period.
BBG’s 3Q16 trailing-12-month EBITDA fell compared to 4Q15 by ~11%, which explains the higher EV-to-EBITDA multiple in 3Q16 compared to 4Q15. BBG’s forward EV-to-EBITDA multiple, which uses market expectations for a company’s EBITDA for the current fiscal year, is 6x. The lower forward multiple indicates that Wall Street expects BBG’s EBITDA to be higher this fiscal year than in the last 12 months, which would also mean that BBG will be undervalued compared to its historical levels.
A peer group comparison of oil-weighted upstream peers shows that BBG is undervalued compared to its peers. Its forward EV-to-EBITDA multiple of ~6x is trading at a discount compared to the peer average of ~10.2x.
Hess (HES) is currently trading at a forward EV-to-EBITDA multiple of ~11.5x. Newfield Exploration (NFX) is trading at a multiple of 10.4x. Continental Resources (CLR) is trading at a higher multiple of ~12.7x.
Together, these companies make up ~5% of the iShares U.S. Oil & Gas Exploration & Production ETF (IEO). BBG’s valuation discount is likely the result of its debt. While it has reduced its debt since last year, as we saw in the previous parts of this series, its leverage is still high. Markets consider this to be risky.