Multiple Expansion says Raymond James - Jan 26

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dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Multiple Expansion says Raymond James - Jan 26

Post by dan_s »

Interesting comments below from Raymond James Industry Update.
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E&P valuations have been woefully lagging all comparative sectors and is easily the lowest among Russell 300 components. While that remains true today you can feel the winds of change making their presence felt. In the last six months, E&P valuations are up nearly 1 full turn on EV/EBITDA, going from 3.9x to 4.8x, still well below historical trading multiples, but improvement nonetheless. < The Sweet 16 closed 2022 at just 2.7X operating cash flow per share. Historically, companies of the quality of the Sweet 16 would trade at 6X to 10X operating CFPS with the high end for those companies with super strong balance sheets and lots of "running room".

How does the group compare to historical levels? This is one reason we believe there is room for growth even after two stellar years for energy stocks. Energy’s P/E ratio is still grossly out of whack compared to historical averages. Currently, the group is valued at half their historical P/E. The industry has changed, that much is true given the drastic shift from growth oriented management teams to those focused exclusively on the generation of FCF and capital returns to investors. We see valuations continuing to improve as the market becomes more comfortable with the sustainability of the new and improved E&P business model. < Let's hope so.
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Matador Resources (MTDR) is a good example of an "Aggressive Growth" company that traded at a much higher multiple in the "Good Old Days". It is funding over 20% annual production growth entirely with operating cash flow and generating free cash flow.
Dan Steffens
Energy Prospectus Group
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