Integrated energy stocks’ valuations
Let’s compare the forward valuations of integrated energy stocks Chevron (CVX), ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and BP (BP). The average forward EV-to-EBITDA (enterprise value-to-EBITDA) and PE multiples of these four companies are 5.7x and 13.4x, respectively.
ExxonMobil stock is trading at a forward EV-to-EBITDA multiple of 7.0x and a forward PE multiple of 16.3x, both higher than the peer averages. Likewise, Chevron is trading above its peer average on both valuation metrics. Shell and BP are trading below the peer averages on both metrics.
ExxonMobil’s and Chevron’s superior valuations
ExxonMobil stock is trading at a premium valuation likely due to its healthy portfolios, integrated earnings model, and strong financials. The company has a robust upstream portfolio and a modern downstream asset base. Thus, ExxonMobil has a sound integrated earnings model capable of generating earnings in volatile business conditions. Besides, the company has strong financials with comfortable debt and cash flow positions.
The premium that markets have given Chevron is likely the result of its financial strength, growing portfolios, and favorable earnings mix. In the first quarter, Chevron’s cash flows came up short of covering its capex and dividends, but the shortfall was smaller than those of its peers. Further, Chevron’s debt position was the second-best among its peers. Chevron also has robust upstream assets that are expected to drive its volume growth, and its advantaged downstream portfolio supports its earnings mix.
Shell’s and BP’s discounted valuations
Shell’s and BP’s valuations are lower, likely due to their debt positions. Compared to ExxonMobil and Chevron, Shell and BP have more debt in their capital structure. While XOM’s and CVX’s total debt-to-total capital ratios stood at 17% and 18%, respectively, in the first quarter of 2019, Shell’s and BP’s ratios stood at 32% and 43%, respectively. BP’s cash flow position was not favorable in the quarter.
Shell’s financials have been strengthening due to its robust strategy, strong upstream portfolio, and critical downstream segment. BP has an expanding upstream portfolio with a strong pipeline of projects. These factors partially offset the lower valuations of these stocks.