The energy industry comps template allows investors to compare one energy company to other ones in the same industry. This method helps to determine the relative value of a particular company. This template looks at Occidental Petroleum which is one of the largest energy company in the United States.
Here is a quick preview of the energy industry comps template.
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How do comparables table work?
A comparables table compares several factors for different companies, which are related to both quality and value. By looking at the comparables table, investors can determine which companies have the best quality at the best price. Creating a comparable table is one of the three main ways of valuing a company, the other two being a discounted cash flow (DCF) and precedent transaction. It is easier to build than a DCF as it requires less information, assumptions and input. It is also more accurate than looking at precedent transactions, which can become outdated easily.
Overall, comparables are quite intuitive and are relatively easy to understand. Since the values created are all on a relative basis, the values are easy to interpret as good or bad.
Choosing comparable companies
To make a useful comps table, the companies chosen must have similar characteristics. For example, a grocery company should not be compared to a energy company. Since the companies operate under different conditions, they will have very different profit margins and trading multiples. Typically, a grocery company will have a low-profit-margin of around 2%. However, that does not mean the grocery stores is not a good investment because all companies within the industry operate with similarly low margin. Thus, in a comparables table, only companies that operate under similar conditions should be used.
Thus, when selecting companies for a comps universe, some things to consider includes:
This template focuses on industry classification, size, and geography. While the other three components are important, they require a deeper dive into a companies financial statement. Also, trying to find companies with similar growth rate, profitability, and capital structure also require a more careful selection process.
The energy industry is composed of companies that produce, refine, and transport energy products. While there are various sources of energy (crude, natural gas, renewables, etc.), this comparables template primarily focuses on the largest oil & gas companies from the United States. Energy is one of the largest sectors of the global economy and provides the energy needed for countries to operate.
One downside for this industry is that energy companies can be extremely volatile due to fluctuations in the global supply & demand for energy. Therefore, investors in this industry need to actively assess external market conditions (through analytical tools such as the PESTEL framework) beyond comparing companies in the sector.
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