ConocoPhillips: the Investor's Guide You've Been Waiting For
(Continued from Prior Part)
ConocoPhillips’s historical valuations
ConocoPhillips’s (COP) 3Q15 EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio was 13.8x. EV is the summation of a company’s market capitalization and net debt.
This is significantly higher than its five-year average multiple of 5.3x. This means that ConocoPhillips is trading at a premium compared to its own historical multiples.
Breaking down the valuation
ConocoPhillips’s forward EV-to-EBITDA multiple—which uses market expectations for a company’s EBITDA for the current fiscal year—is 8.6x. The lower forward multiple indicates that Wall Street expects ConocoPhillips’s EBITDA to be higher this fiscal year, compared to the last 12 months, and would also bring its valuation closer to its historic multiple. This also explains why the company currently trading at a higher multiple.
As we saw in Part 5 of this series, ConocoPhillips’s EBITDA has fallen significantly this year. Additionally, its EV has declined, along with its stock price (see Part 1). Upstream companies including Anadarko Petroleum Corporation (APC), Apache Corporation (APA), and Hess Corporation (HES) have also seen lower EBITDA levels this year, compared to 2014 on account of lower crude oil prices. These companies’ respective 3Q15 EBITDAs have declined by ~90%, ~65%, and ~68%, respectively, compared to 3Q14. All these companies make up ~9% of the Vanguard Energy ETF (VDE).
ConocoPhillips’s EV (enterprise value) stood at ~$82 billion in 3Q15, compared to ~$110 billion in 3Q14, while its net debt increased from $15.4 billion in 3Q14 to ~$22.5 billion in 3Q15.
ConocoPhillips’s proved reserves
As of December 31, 2014, ConocoPhillips had net proved reserves of 2.7 billion barrels of crude oil equivalent, and 715 MMboe (million barrels of oil equivalent) of NGLs (natural gas liquids). It also proved reserves of 3.4 billion barrels of crude oil equivalent of natural gas and proved reserves of 2 billion barrels of crude oil equivalent of bitumen. Combined, these proved reserves are the energy equivalent of ~8.9 billion barrels of oil. Of this, oil accounts for 30%.
According to ConocoPhillips’s 10-K filing, the discounted value of its reserve base at the end of 2014 was $83.2 billion. This will be lower today, given the lower price of crude, compared to the end of 2014.
Proved reserves are an important metric when considering a company’s valuation. They determine the volumes that an oil and gas company can recover in the future, so they also determine future cash flows.
Continue to the next part of this series for a telling look at ConocoPhillips’s relative valuation in December 2015.
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