Two $900+ million asset sales were announced on September 3rd, 2019. The producing oil and gas assets were sold by publicly traded companies, Concho Resources Inc. (CXO) of Midland, Texas and Crescent Point Energy Corp. (CPG) of Calgary, Alberta and were purchased by private equity backed companies. Despite transaction similarities and concurrent timing, valuation differences led the selling companies' share prices to react quite differently:
The performance difference is more stark over a month time period, as the market seems to have been pricing in some impact of an asset sale into Crescent Point's share price in the days leading up to the sale:
Further highlighting the performance difference, this shows a month of out-performance of Crescent Point versus two energy equity index ETFs, small cap energy (PSCE) and S&P energy (XOP) month share price performance as well as Concho, which traded roughly in line with the ETFs:
And finally this shows Concho, Crescent Point and the S&P energy index ETF XOP over the past year. Concho had generally outperformed the index and Crescent Point had under-performed it for most of the year, but recently both converged with the index and then Crescent Point out-performed after their asset sale:
The following shows the consensus EV/EBITDA metric for Crescent Point and Concho over the past year. Crescent Point is clearly attributed a substantially lower market valuation: (it is best to ignore the January-March period for Concho, as it was distorted by incorrect merger historical information)
And on a consensus forward EV/EBITDA basis, the valuation gap is slightly lower but Concho is still valued at nearly 2x the valuation of Crescent Point:
What makes this even more interesting is that even though the headline numbers of the transactions were very similar ($925 million for Concho and $912 million for Crescent Point), Concho reported in US dollars while Crescent Point did so in Canadian dollars! The USD value of Crescent Point's sale was closer to $700 million.
Crescent Point estimated they sold their assets for 4.7x cash flow (measured similarly to EBITDA). While Concho did not disclose the cash flow metric on its asset sale in its announcement nor in its subsequent presentation, it was likely higher, as it equated to $37,000 per barrel of oil equivalent per day (boepd). Crescent Point's sale, in USD, equated to approximately $26,000 / boepd.
So despite a higher valuation on its assets sold, Concho's shares performed worse after announcement than Crescent Point's. This appears to be primarily because of low expectations embedded into the low valuation of Crescent Point's shares on an EV/EBITDA basis, compared to the higher expectations embedded into Concho's nearly 2x higher EV/EBITDA.
We tend to be most attracted to low valuation companies for this reason: embedded low expectations and a resultant margin of safety. The less the market expects of a company, the easier it is for the company to exceed the market's expectations, sending its share price higher. The converse is true as well: a high valuation implies high expectations, which may be more easily disappointed, sending its share price down. Even a comparatively high valuation asset sale can send a share price down, and even a comparatively low valuation sale can send a share price up, as evidenced by these parallel sales by Concho and Crescent Point.
Disclosure: I am/we are long CPG.
Additional disclosure: Important Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC and CSA filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises own shares in Crescent Point Energy and may buy or sell shares without any further notice.