Integrated energy stocks’ valuation
These companies’ average forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) and PE (price-to-earnings) multiples are 6.8x and 18.7x, respectively. XOM has forward EV-to-EBITDA and PE multiples of 8.4x and 19.9x, higher than the peer averages. Whereas CVX is also trading above the peer averages, Shell and BP are trading below them, as shown in the chart below.
Why their valuation differs
XOM’s and CVX’s premium valuation is likely due to them having lower debt than Shell and BP. The integrated energy companies discussed in this series have all seen their debt rise recently due to volatile oil prices. BP (BP) was hit by Gulf of Mexico oil spill costs, and Shell’s debt increased with the acquisition of BG Group.
In 3Q17, ExxonMobil had the lowest total-debt-to-total-capital ratio, of 18%, whereas Chevron’s ratio stood at 22%. Shell and BP had higher leverage ratios of 31% and 44%, respectively, in 3Q17, showing that XOM and CVX are in a better leverage position than Shell and BP. Shell’s and BP’s higher leverage may be driving their valuation lower.