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Monday April 16, 2012
Energy Partners: Shallow water, deep profits
by Lou Gagliardi, editor Cabot Global Energy Investor  Our latest stock pick is an oil-weighted U.S. exploration & production firm operating in shallow water of the U.S. Gulf: Energy Partners Ltd. (EPL). Its operations are based in New Orleans and Houston, and it has a market cap of roughly $680 million. The company has expanded through select “oily” assets in shallow water in the U.S. Gulf. In November 2011, Energy Partners acquired proven (1P) reserves of 1.3 million barrels of oil equivalent (boe) for $38.4 million in cash, at $29.54/boe. The reserves are located in shallow water in the central Gulf of Mexico. The transaction price appears relatively modest and in line with the value of EPL’s existing proven reserves of $26.70/boe as calculated by my discounted models. Competitive Advantages • Strong Balance Sheet: Post acquisition, the company has a net (including cash) debt to capital ratio of 20%. • High interest coverage ratio: The EBITDA to interest multiple for 2012 is 12.3 times. • Weighted to Oil: The company’s reserves are weighted toward oil, with a 74% oil to gas proven (1P) reserves ratio. Its production profile is oil-weighted, with production in 2012 targeted at 81%. • Brent Pricing: Additionally, Energy Partners has a price competitive advantage to most U.S. onshore E&P producers since its production is Light Louisiana Sweet (LLS) in the Gulf region where its crude obtains price realizations at Brent levels. Positive Catalysts • Energy Partners has increased its 2012 production guidance to a range of 9,200 to 9,500 barrels per day with 82% of that production in oil. • Consensus earnings have increased over the last 30 days. Undervaluation • I ran EPL through my discounted cash flow models and its net asset value (NAV) is roughly $20.00 a share at a WTI $100/barrel and $2.50 per Mcf 2012 price deck, or 20% below current market prices. My models indicate that the market is currently discounting EPL at roughly a $90 WTI price deck. • Compared to peers Forest Oil, Stone Energy, Gulfport Energy and Energy XXI, EPl trades at a relative discount on a 2012 P/E ratio, has the stronger balance sheet, and except for Gulfport, has the highest oil production weighting. Learn more about this financial newsletter at Lou Gagliardi's Cabot Global Energy Investor. Related articles: 
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