Valuing oil and gas service companies versus oil and gas producers is far more standard. Oil and Gas service providers are generally lagging stocks when it comes to a rise in oil, and that makes it a great time to find some undervalued stocks.
Most commonly oil and gas service companies are valued using ratios. These are taken from comparable transactions and comparable company screenings. You can screen for companies with similar size, business description, industry, service offering, location and products.
The most common ratio’s used for analysis are:
- Enterprise Value/EBIDTA
- Price/Tangible Book Value
- Price/Revenue
- Price/Earnings
There are other ratios that can be used, but by far the most common, and most relevant is EV/EBTIDA. Other ways of valuing a service company include the common DCF model, and a capitalized cash flow model. A final way to check the minimum value of the business is a Tangible Asset Backing which is the current value of all assets in the company minus liabilities. It is the value of the business if everything was sold off for cash and all debts were repaid.
Oil service companies are highly cyclical on commodity prices as well as economic outlooks, and as we enter a promising year in the oil and gas industry we should see valuations start to pick up.
Can you name any interesting oil and gas service companies to discuss?
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would EV/DCAF be useful for these companies or would it not apply since they are service based?
I'm guessing they don't have the crazy resource taxes that producers have.
Baker Hughes, Schlumberger, RPC, Petrofac are some of the larger ones. Oh and of course Halliburton and Transocean are big players in that space. Seeking Alpha had a discussion about some of the aforementioned late last year.
BP
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What if it is pre-cash flow and just has reserves that have PV10's from a large reserve auditor. Would they trade on a multiple of EV/PV10, EV/Risked resources or EV/unrisked resources?
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