<<Obviously, a company rapidly de-leveraging will increase its Enterprise Value>>Larger EV makes EV/EBITDA LESS favorable the way higher price makes PE less favorable. Actually, not much at all is obvious about de-leveraging. How much stock is going to be issued in place of debt? Shareholders are lower in priority than debtholders in case of BK, so are more at risk with overleveraged entity. The debt holders will want a favorable exchange and as you indicated in a previous post, they pretty much own the company. I doubt management has much of a fix on how much dilution could come out of this de-leveraging, but by tripling share count in 3 years ending 12/98, they've shown no reluctance to dilute.
If RRC's EV/EBITDA was way below industry average and we had some guidance on what it might look like on the other side of the de-leveraging then perhaps risk/reward would justify, but despite falloff from prior levels, current EV/EBITDA are very much in line with industry averages and thus don't offset risk.
I haven't found much regarding possible net asset value of this, but some analysts consider NAV per share, [net of lifting & other costs, and debt]to be good valuation tool for natural resource type companies.
Also note that hedging operations have put partial ceiling on price RRC can realize if gas price soars. I think this makes good business sense, especially for leveraged entity, but you had indicated this had call-like features. If you want a call on gas price, check for one on NG contract, this ain't it. When I looked at NG prices going back to '93 and saw several spikes above 3...they didn't last more than 2-3 months. I regressed the prices 3 and 7 years: in both cases the line currently at about 2.60 with the latter showing 8.6% annual growth. It's smart biz for producers to hedge, especially above $3.
bob |
