Valuation Check In

I wanted to check in on the valuations of these companies to see if there are any readjustments I need to do.  I'm still holding about 57% of the E&P portfolio in WLL, 24% in CHK, and 18% in APA.  There was no buying and selling over the period.

Overall I was able to outperform the market over the three month period from when we last checked in.  The majority of the out-performance is attributable to Whiting Petroleum, the largest position.  The Bakken in general was by far the best performing group, driven considerably by the WLL/KOG merger announcement.  Gas levered companies did badly, including all of the Marcellus companies and the two most gas-weighted diversified E&Ps, SWN and CHK.  CHK was my real loser over the period.  Note that the stock price for CHK is adjusted to include the current market value of the Seventy Seven Energy shares that were distributed to CHK shareholders in a spin out.

I also updated my valuation spreadsheet by checking into the net debt, sharecount and 12 month trailing EBITDA for each of the companies on Yahoo finance.

Despite the sell-off the Marcellus names remain very expensive.  Among the Marcellus names, RRC and COG are really the premier companies in my opinion, but I’m still content to sit on the sidelines for now even after they lost 15% over the last quarter.  Its still a bit of a mystery to me how these companies should be valued.  They have the lowest cost of production for any sort of energy in North America, but they are also constrained from exporting it, and there is so much damn gas that its hard to see prices rising much.

The Permian companies managed to outperform the market and the sector in general.  And the valuations just seem totally crazy to me.  Pioneer is a $34b enterprise value with trailing EBITDA of less than $2b.  This is just far to rich.  EOG is a much better company with better growth, better drilling prospects, and a history of terrific execution, and trades at 8.5x trailing EBITDA.  And that is after going up 20% in the last quarter.   I just don’t see how these Permian Basin companies can command the valuations that they’re trading at.

To me the real opportunities are in the diversified companies.  It does not make sense that Apache, which has operations in the Permian basin that rival both CXO and PXD in size should trade at ¼ their valuation.  It does not make sense that MRO (Marathon) should trade at such a small fraction of the Bakken producers either.   Marathon puts about 60% of their capital into the Bakken + Eagleford + Anadarko basin so why do they trade now where near the valuation of pure play companies?

Within the Bakken, Whiting remains a good value in my opinion, and I have not sold any shares despite the run they’ve had.  Whiting, after the Kodiak acquisition, will be similar in size to Continental, but again there is a large valuation gap.  As of today, the valuation is about 70% higher for Continental on a trailing EV/EBITDA basis.  If Whiting starts to trade up into the 9x EBITDA range I may take some profits, but I’m comfortable with the valuation because I think that Whiting’s capital efficiency is likely to continue to show improvement.

New valuation spreadsheet notes shown below.  this is probably pretty boring, but I included my notes from this exercise.  I was comparing sharecount, net debt, and 12 month trailing EBITDA since last check in April.

Diversified:

EOG-  Sharecount climbed by a few hundred thousand since January, presumably due to executive options.  Net debt shrank from 4.5b to 4.24b.

APA- Sharecount was down to 385.7 from 395mm, or about 3%.  Net debt climbed a bit from 7.5b to 7.87b.

APC- Debt shrank from 10.5b to 8.5b (there must have been asset sales here).  Sharecount crept up a bit.

HES- debt went from 3.76b to 4.29b.  Sharecount decreased by 4mm to 318.1

OXY-Debt went from 2.9 to 4.750b Sharecount decreased by 10mm to 785.61mm

MRO- Debt decreased from 6.5b to 4.5b (overseas asset sales?).  Sharecount decreased by 20mm to 676.06.  A 3% decrease in sharecount over 6 months is pretty impressive, especially while also reducing debt.  They also pay a 2% dividend.  Maybe I should be looking more closely at MRO?

DVN-Debt increased MASSIVELY to 13.49b from only about 6b.  What did they buy??  Sharecount crept up a fraction, fairly stable.

CHK- Debt dropped DRAMATICALLY to 13.03 b, down about 4.6b from earlier.  A big chunk of this is probably from the CHK midstream spinout (Seventy Seven Energy).  Sharecount stable, declining slightly.

NBL-Debt up by 200mm to 3920mm.  Sharecount is perfectly unchanged.

SWN-  4b cash surplus to a 1.8b net debt?  What did they buy?

MUR- Net debt increased by 400mm to 2.430b.  ~2% decrease in sharecount.

PERMIAN

CXO- Minimal increase in net debt by 100mm to 3.77b.  Sharecount creeps up by .2%

PXD- Increase in net debt by 200mm to 2.45b (still quite low.)

LPI- Net debt up by $80m to 960mm

XEC- net debt increased by 200mm to 1.020b.

EGN- Net Debt stable, sharecount stable.

BAKKEN COMPANIES

WLL- Net debt increased by 700mm to 2.24b.  No change in sharecount at all.  Valuation is now looking a bit more full at almost 7x ebitda on a trailing basis.  Despite the big increase in price, this still looks like the best Bakken company to own from a valuation perspective.

CLR-Net debt up by about $1b to 5.020 b.  They are spending money like its 2011.

KOG-  Net debt stable at 2.24b.  At 3.5x net debt/ebitda, they were constrained from borrowing more.

OAS: net debt up by ~300mm to 2.20.  They are also running at 3x net debt/ebitda.

NOG: NET debt increases from 527mm to 900mm.  Sharecount is stable.  Their EBITDA must have increased too though.

Marcellus:

RRC:  net debt inched upward to 2.23b.  Sharecount is stable, but I know they authorized more share issues.  It must not have happened yet.

EQT: Net Debt creeping up to 1.70b from 1.4b.  Sharecount up by about 4m to 151mm.  That is a disconcertingly large amount of issuance for options incentives.

COG: Net debt stable at 1.19b.  Sharecount up by about 1mm to 417.

UPL: debt down from 3.8b to 2.4b.  They are now trading at just 7.4x trailing EBITDA?  Could they be a takeover target for someone like SWN?  The share price is about where it was when the original valuation was made, but it has been a bit of a wild ride indeed.

AR: Debt up by 700mm to 2620mm.  Sharecount stable.  Debt is going to have to go up a lot more too, because they have to drill like crazy to grow into their $18b valuation.  32x trailing EBITDA!  I’m skeptical about a company going so big like this.  I’d be interested to learn more about Antero, but my initial instinct is don’t touch these guys with a 10ft pole.  They are like Range, but less well established.  And in the Marcellus/Utica, you have to have scale to be able to get the take-away capacity.