First, we chose three comparable companies which are Quicksilver Resources Inc (KWK), Penn Virginia Corp (PVA), and Swift Energy Co (SFY), because they have similar market capitalization and belong to the same E&P sub-industry. Then, we downloaded financial statements and 10-Ks from Bloomberg. Last, we performed the comparable analysis (see Exhibit 1).
Judging from the liquidity ratios, including current ratio, quick ratio and cash ratio, EPM has higher ratios than all the other comparable companies, which means EPM has better ability to pay off its short-terms debts obligations than its peers.
Judging from the activity ratios, including receivable turnover and payable turnover, EPM’s ratios are increasing continuously and they are all above those of the other three companies. This indicates that the company's management is doing an increasingly better job of generating revenues from its resources.
Judging from the operating margin, which equals EBIT divided by Net Sales, though EPM has negative operating margin up to 2009, it enjoys a fast increasing trend. From 2010 to 2012, it increased almost 50 percent. Comparing with comparable companies, it has the highest operating margin, which indicates that it’s the most profitable one among them. However, it’s ROE is relatively small among them because of the company’s debt free capital structure, diluting earnings exclusively to stockholders but bondholders.
From the D/E ratio, we can measure the proportion of equity and debt the company is using to finance its assets. EPM has a far lower D/E ratio than the other three does, which means the company has been conservative in financing its growth with debt, and thus contributes to stable earnings as a result of less additional interest expense.
Above all, the company is in a good condition and enjoys a promising future development.
Alternative Valuation Method
Since Evolution Petroleum Corp. is an E&P company, DCF model