Valuations for big energy companies like Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) are hard to get a grip on with rapidly shifting oil prices.
On the one hand intrinsic values, which usually come from a discounted cashflow model, rely on making assumptions around the future price of oil which many expert analysts can't agree on.
On the other hand volatile oil prices mean reported asset values are quickly out of date or invalidated by impairments, so asset-based valuations are also sketchy.
An alternative method
We can however compare the relative value of energy producers using Enterprise value (EV) divided by each company's 2P (proved plus probable) energy reserves (EV/2P ratio). Enterprise value adjusts market capitalisation for debt and cash which helps to level the playing field.
Over the last 12 months these ratios have changed drastically. Santos and Senex Energy Ltd (ASX: SXY) have both sold off 2P reserves, Woodside Petroleum has bought new reserves and Beach Energy Ltd (ASX: BPT) has acquired an entire company named Drillsearch Energy.
How they rank
Of the four companies mentioned above, as well as smaller producer Cooper Energy Ltd (ASX: COE), Senex Energy has by far the cheapest EV/2P ratio of just 2.6.
| Company (ASX:Code) | Enterprise Value ($millions) | 2P reserves (mmboe) | EV/2P |
| Senex Energy Ltd (ASX: SXY) | 194 | 74.5 | 2.6 |
| Cooper Energy Ltd (ASX: COE) | 60 | 20 | 3.0 |
| Beach Energy Ltd (ASX: BPT) | 1,005 | 100 | 10.1 |
| Santos Ltd (ASX: STO) | 13,383 | 945 | 14.2 |
| Woodside Petroleum Limited (ASX: WPL) | 27,949 | 1,508 | 18.5 |
Source: Company reports
Notes: STO and WPL 2P reserves as at 31 December 2015. SXY 2P reserves as at 30 June 2015, minus adjustment for sale of Maisey Block, aprox 20mmboe. BPT 2P reserves as at 30 June 2015, plus adjustment for Drillsearch acquisition. BPT estimated EV post Drillsearch acquisition.
The massive difference for Senex lies in the way Enterprise value is calculated, removing cash from market capitalisation (market cap) and adding debt.
Senex has a huge cash pile which earlier this year made up 70% of the company's market cap, and has no debt, dragging the Enterprise value down, while still holding substantial 2P reserves.
Santos has almost the reverse problem, the company's large debt position pushes up its Enterprise value, but the company has fewer 2P reserves after a year of strong production, asset sales and down scaling reserves from 2P to 2C (contingent resources).
Cheap, but what about value?
In my view Senex is not only the cheapest of the listed energy producers, but one of the best placed to achieve growth over the next five years. The company has the cash position to invest in developing its reserves, no debt, and an agreement in place to sell the gas.
