Integrated energy stocks’ valuation
Previously, we reviewed the changes in integrated energy stocks’ short interest. In this part, we’ll compare forward valuations of integrated energy stocks ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP).
The average forward EV-to-EBITDA and average PE of these four companies stand at 5.8x and 14.4x, respectively. ExxonMobil trades at 7.1x its forward EV-to-EBITDA and 16.7x its forward price-to-earnings, both higher than the peer averages. Likewise, Chevron trades above peer averages on both parameters. However, Shell and BP trade below their peer averages on both valuation metrics.
Why do ExxonMobil and Chevron trade at higher valuations, while Shell and BP trade at discounted valuations? Let’s begin by analyzing each of them, starting with ExxonMobil.
ExxonMobil and Chevron’s higher valuations
ExxonMobil commands premium valuations due to its strong financials in comparison to peers. ExxonMobil has a best-in-class debt ratio (total debt-to-total capital). Also, ExxonMobil’s operating cash flow rose sharply in 2018.
Further, ExxonMobil successfully utilized its integrated value chain to raise earnings in its downstream segment in the second half of the year. Thus, the company has a robust upstream portfolio, an advantageous downstream portfolio, and a strong midstream asset base.
Similarly, Chevron has a healthy, expanding, and diverse upstream portfolio. In 2018, Chevron’s hydrocarbon production rose to record highs, which is expected to continue in the first quarter. Thus, better oil prices coupled with upstream production growth could lead to a steep surge in Chevron’s upstream earnings.
Shell and BP’s lower valuations
Shell trades below peer averages likely because of its relatively high debt in its capital structure. Similarly, BP reels under a high debt burden compared to peers. Though both companies’ debt positions have been improving, their debt ratios continue to be higher than those of XOM and CVX.