The valuation sweet spot for publicly-traded E&P companies is best defined by looking at market capitalization (i.e. most recent share price multiplied by shares outstanding). Using a sample of 33 firms, we found that investors favored firms whose market capitalizations were between five to ten billion U.S. dollars. To gauge valuations, we compared each firm's standardized measure of discounted net cash flows (as reported to the SEC) versus their market capitalization.
We took up this exercise as a quest to see if there was any distinction being made by the market based on the intensity/mix of what firms were producing. Given the weakness of natural gas prices over the last year, we anticipated that companies with a focus on oil would favor better. However, our analysis showed that the market was not relying on this factor primarily for its selection process. In fact, three of the top five firms based on relative valuations had very little exposure to oil exploration.
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