Has the U.S. Oil Boom Gone Too Far?

According to the projects and technology director at Royal Dutch Shell, Matthias Bichsel, the United States oil and gas industry has "over-fracked and over-drilled." Mr Bichsel made this statement in an interview he gave to the Financial Post in the middle of October.

While Mr Bichsel himself stated that he did not believe that the U.S. oil and gas industry was in a bubble, on some valuation metrics it does appear to be. Indeed, with the rush to benefit from the domestic oil boom, stocks involved in the U.S. oil revolution have been in demand. In particular, shares of Pioneer Natural Resources (PXD 0.10%) and EOG Resources (EOG 0.59%) have exploded 97% and 50% so far this year. But does this now leave them looking overvalued?

For this analysis I will be using four common valuation methods:

1. Enterprise value to revenue

2. Enterprise value to daily production

3. Enterprise value to proved reserves on an oil equivalent barrel basis

4. Price to cash flow

So how do the valuations look?

Sources: Yahoo Finance, EOG Resources, Chevron, ExxonMobil and Pioneer Natural Resources. Figures in billions. Reserve and production figures taken from the end of 2012. $US billions

Let's have a look at some ratios based on the figures above.

Sources: Yahoo Finance

It would appear that on all metrics, the domestic producers are trading at a premium to their international, vertically integrated peers. In particular, Pioneer Natural Resources is trading at a huge premium over its peers on a EV/production or EV/2P basis. This leaves me wondering if Pioneer Natural is worth a 1,000% premium over the world's largest oil company, Exxon, when it comes to proved reserves.

Paying nearly double
Indeed, think about it this way: At current prices you are paying just under $196 per barrel in Pioneer's reserves. With oil prices currently below $100 per barrel this makes no sense.

So based on historic metrics alone, the two domestic, independent producers, EOG and Pioneer both trade a premiums to their much larger, vertically integrated international oil and gas peers.

Having said that, one of the reasons that US domestic producers have been so appealing is their ability to rapidly increase production while majors have been floundering. So based on estimated production figures for 2013, how do these companies look?

Projected production

Sources: EOG Resources, and Pioneer Natural Resources. Figures in billions. Reserve and production figures estimates explained below. $US billions.

For the basis of this table I have used EOG's fiscal second quarter production guidance for a 35% increase in full-year 2013 output. In addition, I have used the company's first half cash flows and doubled to give an annualized cash flow figure .

I have also used Pioneer Natural's management estimates for a 16% year-on-year increase in production for full-year 2013 at the high end. The company's first half free cash flow was $935 million, which I have doubled to give an annualized figure.  

Still, even based on 2013 production forecasts, Pioneer Natural Resources looks expensive. On the other hand, EOG does not look too bad. Indeed, on an EV/daily production basis based on full-year 2013 estimates the company looks cheaper than both Exxon and Chevron. What's more, for full-year 2013, based on figures for the first half of this year, EOG is going to produce free cash flow of around $24 per share; that's a cash flow per share ratio of 7.7, only slightly higher than Chevron and Exxon.

Foolish summary
So overall, this is just a quick overview, but even based on production estimates for next year, Pioneer and EOG are both trading at large premiums to their international peers on many metrics.

This leads me to conclude that perhaps the gold rush for U.S. oil has gone too far, I just don't believe paying nearly $200 per barrel of Pioneer's reserves is justifiable. EOG on the other hand looks to trade at a more level-headed valuation. Still, Exxon's low valuation is hardly justifiable, considering that it is the biggest integrated oil company in the world.