These leverage ratios factor into the reasons why these stocks are trading in the $5 per share range — the market hates companies that have too much debt. One other thing that I will point out is that both SandRidge Energy Inc. (NYSE:SD) and Magnum Hunter have more reasonable debt to enterprise values though both do have preferred shares which could count as debt. The bottom line is that when looking at a company’s value, it’s best to look deeper than just its stock price before you buy.
Source: SandRidge Energy
Looking at the enterprise value for an energy company provides a more accurate picture of what investors are really paying for the company as a whole. That’s because from here we can then take a look at how a company is trading against its EBITDA, which is a good proxy for its potential cash-generating ability. It also gives you an idea of what a potential acquirer might be willing to pay for the company in question. By dividing its enterprise value into its trailing-12-month EBITDA we get a ratio which paints a clearer picture than a price to earnings ratio, which can be deceiving because many of these companies don’t have any earnings:
| Company | Enterprise Value | TTM EBITDA | EV/EBITDA |
|---|---|---|---|
| SandRidge Energy | $4.1 billion | $1.1 billion | 3.6 |
| Abraxas Petroleum | $336.4 million | $31 million | 10.8 |
| Quicksilver Resources Inc (NYSE:KWK) | $2.4 billion | $282.6 million | 8.5 |
| Magnum Hunter Resources | $1.5 billion | $108 million* | 14.1 |
| Halcon Resources | $4.5 billion | $181.6 million | 24.8 |
Source: Company SEC filings and author’s calculations. * Magnum Hunter TTM EBITA as of last filed 10-Qs.
Here again we can make some distinct observations. When looking at SandRidge and Halcon, both stocks are trading around $5 per share, but the best stock to buy is clearly SandRidge if you are looking to buy a cheap stock. That’s even after taking into account the fact that SandRidge recently sold its Permian Basin assets which has inflated its trailing-12-month EBITDA a little bit (pro forma the EV/EBITDA ratio is closer to five times). Even with that adjustment SandRidge Energy Inc. (NYSE:SD) is trading well below these peers.
Final Foolish thoughts
The numbers are pretty clear, if you are looking to buy a cheap stock, the best of this bunch to buy is SandRidge Energy Inc. (NYSE:SD). That opinion doesn’t take into consideration how fast a company is growing its EBITDA, nor does it account for any value of hidden assets like undeveloped reserves. Think of this as a good starting point and a reminder that a stock’s value has nothing to do with its price.
The article What’s the Best $5 Energy Stock to Buy? originally appeared on Fool.com and is written by Matt DiLallo.
Fool contributor Matt DiLallo owns shares of SandRidge Energy. Matt DiLallo has the following options: Short Sep 2013 $5 Puts on SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned.
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