screening for value

I'm starting to compare valuations and get some names ready in case I want to start buying any time soon here.  As a reminder, the only E&P stock I own is Whiting at the moment, having sold CHK (July), APA (September), EOG (bought in Sep at 101.50, sold in December 96.50).  Other non-E&P energy related stocks which I have owned are CVX and FCX (also sold in September).  I also previously mentioned that I own American Airlines, which I bought quite well in September and sold half in December, and I also own CF Industries, a play on durable low-cost North American natural gas.

A year ago I had done a screen comparing the growth rate of production and the enterprise value/EBITDA.  EV/EBITDA is the enterprise value, net debt plus market capitalization, divided by the earnings before interest taxes depreciation and amortization.  This ratio is a simplification, but it is greatly superior to using the PE ratio for E&P companies, especially for companies where debt is a large part of the valuation.

Today I did another screen but instead of using growth rate I used leverage, as defined by net debt/ebitda.   In a contraction like this one it is important to examine the debt situation of the company.

First a few comments on this screen.

1) The gas companies (COG, RRC, EQT, SWN, UPL, AR) appear to be a bit more richly valued than they actually are relative to the oil companies.  This is because gas was already low last year, so they can reasonably expect their ebitda to hold up better in 2015.  Companies with a lot of "wet gas" such as RRC and AR, will still get hit by lower natural gas liquids prices, which are somewhat connected to oil.

2) This chart might suggest that some of the very highly levered companies are good shorts, such as GDP, SFY, SD.  Unfortunately I have missed the boat on these companies.  Although their EV/EBITDA may not look particularly low, their equity value has gone down by 80% or more from their 52 week high.  Even if I knew for a fact that these companies would go bankrupt a year from now if prices didn't improve, it still wouldn't be a good short.  Any rally in oil prices could triple these almost overnight.  In fact, anyone who is bullish on oil  prices in the near term could buy these if they want some serious leverage.

3) Bakken producers appear over leveraged in general.  None of these 4 appear particularly comfortable at about 2-3x net debt/2014 ebitda.  Their leverage ratio could increase dramatically next year if we see no improvement in oil prices.  On the other hand, some of these companies are trading at under $10 per barrel of proved reserves.  Recent offshore projects, like the Hes one approved several months ago, have $20 capex per bbl of "recoverable resource).  These companies may be prime candidates for the majors or large-cap E&Ps if things stay ugly.

4) Permian valuations still seem high to me, but I've been saying this for a while and the gap has not closed.

5) The valuation gap between the smaller and larger companies has closed (smaller companies used to be valued more highly), but the large caps still seem to be a better bet to me.  Although they were growing more slowly, this may turn into an advantage, since the smaller companies will see much bigger declines if they stop drilling- more on this later.

5) Some of the lower leverage, low valuation midcap companies like QEP and SM might deserve a look on the long side.  They have seen huge declines but don't have much debt.