This energy industry comps template provides a guideline and example of what a comparables universe would look like for a company in the energy industry. As an example, we are constructing a comparables universe for Occidental Petroleum (NYSE:OXY) which is one of the largest energy company in the United States.
Comparable Company Analysis
Comparable company analysis ("comps") is a method of valuation that compares financial ratios across multiple companies to value a business. Unlike the discounted cash flow (DCF) analysis, an intrinsic form of valuation, comps analysis is a relative form of valuation. This telecom industry comps template provides a simple look into the telecommunications industry. In many ways, comps analysis is simpler than DCF analysis. Comps analysis uses fewer assumptions. Conversely, DCF analysis uses assumptions to forecast each line item, with many moving parts in the model.
Additionally, comps analysis is much easier to understand intuitively. The act of comparing things to determine values and make conclusions is a natural part of human behavior. By using this principle, comps tables simplify and make the valuation process easy to digest. Another benefit of comps analysis is that it helps capture the current market state.
For example, there are often times when the market is down or the market is up, especially in a relatively volatile industry like energy. Therefore, if the market is up, this will be reflected in the comparable companies as well. This idea also applies to firms in cyclical industries, as the cyclical nature will be captured by all comparable companies. This helps compensate for one of the weaknesses of DCF analyses – that it is hard to forecast cyclical companies.
Choosing Comparable Companies
When choosing comparable companies for a comps table, an analyst must choose companies similar to the valuation company. Financial analysts look at several comparison points when choosing comparable companies. It is not likely that all of these elements will match, but it is always good to consider them while choosing companies for your comps table. CFI's energy industry comps template considers these factors:
- Industry Classification
- Growth Rate
- Capital Structure
As this is is an industry-specific template, industry classification is matched by default. However, it is important to look at more specific subcategories of an industry. For example, Occidental Petroleum is an integrated oil & gas company. Thus, other integrated oil & gas companies such as Chevron (NYSE:CVX) are appropriate matches.
However, Occidental Petroleum also has a sizable presence in Exploration & Production (E&P). Therefore, a company like EOG Resources (NYSE:EOG), which is an E&P company, would be a great match for Occidental. However, valuation is both an art and a science. You can modify this energy industry comps template to include any company if you feel they are good choices.
As growth rate, profitability, and capital structure are typically difficult to match, we have prioritized size and geography as the matching factors. This template includes companies that show the following characteristics as well:
- Similar size and geographical coverage
- Similar size and different geographical coverage
- Different size and similar geographical coverage
- Companies with similar business models
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