Integrated energy stocks’ valuations
Previously, we reviewed the changes in integrated energy stocks’ short interest. In this article, we’ll compare the forward valuations of integrated energy stocks ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP).
The forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) and PE (price-to-earnings multiple) averages of these companies stand at 6.3x and 15.4x, respectively. XOM is trading at a forward EV-to-EBITDA of 7.6x and a forward PE of 16.9x, higher than both the peer averages. CVX is also trading above the peer averages on both parameters. However, Shell and BP are trading below the peer averages.
Why are XOM and CVX trading at higher valuations while Shell and BP are trading at discounted valuations? Let’s start by analyzing each stock.
XOM’s superior valuations
ExxonMobil strongly focuses on an integrated growth model to derive value from every molecule processed. The company focuses on expanding both its upstream and downstream segments. Plus, ExxonMobil’s robust financials are denoted by its best-in-class debt, which further strengthened in the first quarter. Read Did ExxonMobil’s Debt Position Strengthen in Q1 2018? to know more.
Similarly, XOM had the most substantial surplus cash flow compared to its peers in the first quarter. Thus, growth prospects and strong financials are the likely reasons the stock commands premium valuations over its peers.
Chevron’s above-average valuations
Chevron aims to grow at all points in the oil price cycle. Its robust upstream portfolio and focus on the high-return downstream value chain attests to this. CVX’s better earnings outlook, integrated earnings model, and financial strength in terms of its comfortable debt position are the likely reasons for its premium over its peers. Chevron has the second-best debt level among its peers. Read Comparing Integrated Energy Companies’ Debt in 1Q18 to know more.
Shell’s discounted valuations
Shell’s trading below the peer averages is likely the result of the high debt in its capital structure. However, Shell’s first-quarter performance showed an improvement in its financial position. Shell saw a 13% YoY (year-over-year) reduction in its net debt in the first quarter. Also, Shell’s strong upstream project pipeline and restructured downstream portfolio could result in higher earnings and cash flows. For more on Shell’s cash flows in comparison to those of its peers, read XOM, CVX, Shell, BP: Which Had Surplus Cash Flow in 1Q18?
BP’s below-average valuations
BP is expected to see a surge in its upstream production in 2018. Also, the company’s Gulf of Mexico oil spill charges have reduced. The company’s financial discipline in terms of cutting costs, optimizing capital expenditure, and selling noncore assets has supported its financials.
In fact, given the surge in oil prices, BP has reported higher first-quarter earnings YoY. However, it continues to reel under its high debt burden. Its net debt rose YoY in the first quarter, which could be why it’s trading at lower valuations than its peers.