In these initial charts, I'm only going to be looking at the companies that are substantially invested in a single region. Comparing the valuation of the various companies can be very difficult because of wildly differing growth rates, and different investment philosophy. It is very hard to compare a fast growing company to one that is growing more slowly. It is also hard to compare one that is borrowing money to invest in growth versus a more conservative one that is financing growth entirely through operating cash flow.
In this chart I have taken the Enterprise value of the various companies (net debt plus market cap) and divided by the bloomberg BEST estimate of 2014 EBITDA. This EBITDA number is an average of sell-side analyst estimates for 2014 earnings. I decided to use this instead of trailing EBITDA because of the rapid rate of growth for many of these companies, and also because the 2013 number reflect a much lower average price for gas, than what we are likely to see in 2014. NGL and oil prices are not likely to move so much if current prices are any indicator. Average sales price for gas was at least 20% lower in 2013 vs current spot price. Then on the Y axis, I have put in expected EBITDA growth. Now the growth rate for the Marcellus (gas) producers is going to be higher partly just because of the huge price increase for gas, as opposed to the actual rate of growth in production.
UP AND TO THE LEFT INDICATES LOWER AND MORE ATTRACTIVE VALUATION. The thing that immediately jumps out from the chart above, is that the Bakken producers appear much more attractively valued than the Permian producers. The Bakken companies at higher growth rates are valued substantially lower than their Permian peers. Oasis (OAS) and Kodiak (KOG) are sort of outliers because they are financing massive capital investment with debt right now, so their growth rate is high and coming off a low base. But even compared to the relatively large companies like Whiting and Continental Resources, the Permian valuations seem quite high.
Also a quick word about the Bloomberg analyst estimates. These are estimates from the "sell side" equity analysts from places like JP Morgan, Bank of America, Goldman, Morgan Stanley, Deutsche Bank etc. These analysts are much more likely to suggest buying a stock than selling it. This may or may not be because banks with sell ratings have a hard time getting business from companies to issue debt or advise on a merger or whatever. Because of this tendency, sell side earnings estimates tend to follow a certain pattern: they start out fairly high, then they are reduced as earnings approach, making it more likely that the company will "beat" earnings expectations. Because the estimates for 2014 are a projection into the distant future, its very likely that they will eventually be reduced slightly to make it easier for the companies to beat.
This second chart is purely based on production, and does not rely on any analyst estimates. Again note that the companies furthest up and to the left are the more attractively valued ones. The metric "value adjusted production" is purely my invention. Basically I am taking the daily production in barrels of oil equivalent, but giving a 66% haircut to the value of gas and a 50% haircut to the value of NGLs to reflect the lower market price for these things. At current market prices this may be slightly over generous to the gas and NGL weighted companies, but I want the metric to be fairly simple, and not change it every time gas prices go up 5%.
In this chart again the Permian producers don't look attractively valued. I may redo this chart without the outliers AR and KOG. AR has basically bought it's recent growth through a big acquisition. KOG outspent their cash flow by 400% in 2012 and 200% in 2013 and they are growing off a low base making it really difficult to compare them.
In this chart I have taken the Enterprise value of the various companies (net debt plus market cap) and divided by the bloomberg BEST estimate of 2014 EBITDA. This EBITDA number is an average of sell-side analyst estimates for 2014 earnings. I decided to use this instead of trailing EBITDA because of the rapid rate of growth for many of these companies, and also because the 2013 number reflect a much lower average price for gas, than what we are likely to see in 2014. NGL and oil prices are not likely to move so much if current prices are any indicator. Average sales price for gas was at least 20% lower in 2013 vs current spot price. Then on the Y axis, I have put in expected EBITDA growth. Now the growth rate for the Marcellus (gas) producers is going to be higher partly just because of the huge price increase for gas, as opposed to the actual rate of growth in production.
UP AND TO THE LEFT INDICATES LOWER AND MORE ATTRACTIVE VALUATION. The thing that immediately jumps out from the chart above, is that the Bakken producers appear much more attractively valued than the Permian producers. The Bakken companies at higher growth rates are valued substantially lower than their Permian peers. Oasis (OAS) and Kodiak (KOG) are sort of outliers because they are financing massive capital investment with debt right now, so their growth rate is high and coming off a low base. But even compared to the relatively large companies like Whiting and Continental Resources, the Permian valuations seem quite high.
Also a quick word about the Bloomberg analyst estimates. These are estimates from the "sell side" equity analysts from places like JP Morgan, Bank of America, Goldman, Morgan Stanley, Deutsche Bank etc. These analysts are much more likely to suggest buying a stock than selling it. This may or may not be because banks with sell ratings have a hard time getting business from companies to issue debt or advise on a merger or whatever. Because of this tendency, sell side earnings estimates tend to follow a certain pattern: they start out fairly high, then they are reduced as earnings approach, making it more likely that the company will "beat" earnings expectations. Because the estimates for 2014 are a projection into the distant future, its very likely that they will eventually be reduced slightly to make it easier for the companies to beat.
This second chart is purely based on production, and does not rely on any analyst estimates. Again note that the companies furthest up and to the left are the more attractively valued ones. The metric "value adjusted production" is purely my invention. Basically I am taking the daily production in barrels of oil equivalent, but giving a 66% haircut to the value of gas and a 50% haircut to the value of NGLs to reflect the lower market price for these things. At current market prices this may be slightly over generous to the gas and NGL weighted companies, but I want the metric to be fairly simple, and not change it every time gas prices go up 5%.
In this chart again the Permian producers don't look attractively valued. I may redo this chart without the outliers AR and KOG. AR has basically bought it's recent growth through a big acquisition. KOG outspent their cash flow by 400% in 2012 and 200% in 2013 and they are growing off a low base making it really difficult to compare them.
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