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Energy Partners: An Energy Patch Up-and-Comer

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Domestic exploration and production is becoming big business, and it's a great place for investors to get in now with select companies.

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Our latest stock pick is an oil-weighted US exploration and production firm operating in the shallow water of the US 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 US 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 Energy Partners'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 US onshore E&P producers since its production is Light Louisiana Sweet (or 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 Energy Partners through my discounted cash flow models, and its net asset value (or NAV) is roughly $20 per 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 Energy Partners at roughly a $90 WTI price deck.
  • Compared to peers Forest Oil (FST), Stone Energy (SGY), Gulfport Energy (GPOR), and Energy XXI (EXXI), Energy Partners 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.

Editor's Note: This article was written by Lou Gagliardi of Cabot Global Energy Investor.

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No positions in stocks mentioned.
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