Is ConocoPhillips an Expensive Stock?



Enterprise multiple

As of 3Q16, ConocoPhillips’s (COP) EV-to-adjusted EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio is much higher than its own historical average EV-to-adjusted-EBITDA ratio of ~6.9x over the last five years. In the last four quarters, COP’s EV-to-adjusted-EBITDA ratio has almost doubled.

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Why ConocoPhillips’s enterprise multiple has increased

COP’s EV-to-adjusted-EBITDA ratio has been increasing quickly since 1Q15 mainly due to the steep fall in its adjusted EBITDA.

From 4Q14 to 3Q16, ConocoPhillips’s enterprise value fell from ~$102.9 billion to ~$78.5 billion, whereas its trailing-12-month EBITDA has fallen from ~$19.9 billion to ~$4.8 billion during the same period.

Forward enterprise multiple

ConocoPhillips’s forward EV-to-EBITDA multiple is ~15x, which is higher than its own historical average of ~6.9x. For 2016, Wall Street analysts estimate ConocoPhillips’s EBITDA to be lower by ~23% YoY (year-over-year) at ~$5.1 billion.

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The enterprise multiple

The EV-to-EBITDA ratio is also called the enterprise multiple, and many analysts prefer it over PE ratio, especially for upstream companies, because it takes into account the debt of a company. In the enterprise multiple, enterprise value is the sum of market capitalization and market value of debt minus total cash and cash equivalents.

Other upstream players

Other upstream companies like W&T Offshore (WTI), Devon Energy (DVN), and Murphy Oil (MUR) have enterprise multiples of ~10x, ~16x, and ~18x, respectively. The Direxion Daily Energy Bull 3X ETF (ERX) is a leveraged ETF that invests in domestic companies from the energy sector.


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