Why Did Andeavor’s Valuations Swap to Premium?



Andeavor’s valuations

Andeavor (ANDV) is trading at a forward PE (price-to-earnings) ratio of 14.4x, above its peer average of 13.9x. However, ANDV’s peers Delek US Holdings (DK) and PBF Energy (PBF) trade below the peer average with forward PEs of 10.6x and 12.4x, respectively.

ANDV is currently trading at a forward EV-to-EBITDA multiple of 8.7x, above the peer average of 7.9x. Andeavor’s peers are mostly trading above the average forward EV-to-EBITDA multiple. However, Marathon Petroleum (MPC), Delek Holdings (DK), and PBF (PBF) are trading below the average.

However, Valero Energy (VLO), HollyFrontier (HFC), and Phillips 66 (PSX) are trading above the peer averages on both valuation ratios.

Why does ANDV have premium valuations?

ANDV’s valuations have swapped from a discount to peer averages in the recent past to a premium to these averages. ANDV previously traded at a discount due to its debt and cash flow positions. ANDV has been expanding in the past few years via acquisitions and organic growth. In the past few quarters, the company completed the acquisition of Western Refining. 

Plus, ANDV has vast ongoing growth activities. These expansion activities, coupled with volatile refining earnings, led to an increase in its debt. ANDV’s total-debt-to-total-capital ratio stood at 40.0% in the first quarter, higher than the peer average.

The sharp rise in ANDV stock in the current quarter has led to a surge in valuations. Andeavor stock has risen by a whopping 49.0% in the current quarter (since April 2).

A significant event that impacted ANDV stock in the current quarter is the ongoing acquisition of ANDV by Marathon Petroleum (MPC). This acquisition is expected to close in the second half of 2018, subject to approvals. The merged entity is expected to be the largest downstream company in the US, capable of generating ~$1.0 billion of synergies and huge combined earnings. We discussed this topic in MPC-ANDV Merger Could Create $1 Billion in Synergies.

Move to the next part to learn about ANDV’s stock performance.

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