Estimated Net Present Value (NPV) of $44 a share is about 50% higher than stock price for hold-rated Encore Acquisition Company (EAC). Released last night, fourth quarter results displayed lower unlevered cash flow (Ebitda) driven by crude oil and natural gas prices.
In a sign of the times, once promising reserves expected to be recovered by an innovative High Pressure Air Injection (HPAI) technique were written down as uneconomic at year-end oil price. Management now looks to tried and true water flooding and potential carbon dioxide injection for its recovery of large unproven volumes in its largest oil field, the Cedar Creek Anticline.
Lower proven reserves contribute to lower NPV in our valuation that capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil. At the same time, we exclude price insurance from our estimates, but we do apply recent favorable results of hedging to reduce debt. Latest calculations result in NPV concentrated 25% on natural gas and 75% on oil. Pointing to expected oil price recovery, futures prices for the next six years averaged US$63 a barrel recently.
Originally published on February 11, 2009.