Why Is PDC Energy Trading at a Premium to Its Peers?

Which Upstream Company Is a Good Bet amid Low Energy Prices?

(Continued from Prior Part)

Relative valuation

PDC Energy (PDCE) had the highest EV-to-adjusted EBITDA (enterprise value to adjusted earnings before interest, tax, depreciation, and amortization) ratio in 2015, at 10.1x. EV is the summation of a company’s market capitalization and net debt.

PDCE’s stock has risen 7% year-over-year (or YoY), while its net debt levels have remained flat. However, its adjusted trailing-12-month EBITDA rose by 52%. This helped to bring PDCE’s ratio below the previous year’s levels. It also helped drive PDCE’s stock higher. PDCE’s forward EV-to-EBITDA ratio is 7x.

Concho Resources’ (CXO) EV-to-adjusted EBITDA in 2015 was 9.8x. CXO’s stock has fallen 2.3% YoY, while its net debt levels have fallen ~13%. Its adjusted trailing-12-month EBITDA in 2015 was ~15% lower than 2014 levels. CXO’s forward EV-to-EBITDA multiple is 11.3x.

Oasis Petroleum’s (OAS) EV-to-adjusted EBITDA in 2015 was ~8.9x. Its stock has fallen ~43% YoY, while its net debt has fallen by ~13%. However, OAS’s adjusted trailing-12-month EBITDA fell by 50%, which helped push the ratio higher than the previous year’s levels. OAS’s forward EV-to-EBITDA multiple is ~8.4X.

Meanwhile, Whiting Petroleum’s (WLL) EV-to-adjusted EBITDA in 2015 was ~6.3x. Its stock has fallen ~80% YoY, while its net debt has fallen by 6%. WLL’s adjusted trailing-12-month EBITDA fell by ~45%, which helped push the ratio higher than the previous year’s levels. The forward EV-to-EBITDA multiple for WLL is ~8.1x.

What do these ratios mean?

The higher forward EV-to-EBITDA multiples for CXO and WLL imply that Wall Street expects their respective EBITDAs to fall this year compared to the last 12 months. The lower forward EV-to-EBITDA multiples for PDCE and OAS imply that Wall Street expects their respective EBITDAs to rise this year compared to the last 12 months.

Mainly, PDCE trades at a premium to its peers due to its superior production, earnings, and leverage numbers.

All these companies make up 4.5% of the iShares U.S. Oil & Gas Exploration & Production ETF (IEO).

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - WLL, OAS, PDCE, and CXO: Which Stock Has Performed Best?

• Part 2 - Why Did Oasis Petroleum’s Revenue Fall in 2015?

• Part 3 - Why WLL Posted a Bigger Earnings Fall than Its Peers