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.
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.
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.