Energy Partners Management Scales Back

Our main encouragement in maintaining a buy recommendation on the stock of Energy Partners (EPL) comes from a low market cash flow multiple near three times in an industry that we think has an attractive outlook. Third quarter results reported today met or exceeded unlevered cash flow (Ebitda) expectations of three months ago, but we have reduced volume expectations for future quarters.

Though NPV appears supported by projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P), the relationship can depend on reinvestment for short reserve life properties. Management may be under pressure to sell properties, cut back on drilling and pay down debt. Chairman Rick Bachmann laments on the quarterly call that the potential buyers for the assets EPL is willing to sell are having trouble getting financing “with the high yield market and the bank credit facilities shrinking”.

Because financial risk may be higher than indicated by our ratio of Debt/Present Value of 0.31, we are more comfortable suggesting a half unlevered weight for EPL stock rather than full in our illustrative McDep Energy Portfolio of buy recommendations. On the positive side for EPL, a renewed rise in oil price may take six-year futures to another double as was the case from the end of 2004 to mid 2006, subject to short declines from time to time.

Originally published on November 7, 2007.