Encore Acquisition: Good News For Income Investors

| About: Erickson Air-Crane (EAC)

Buy-recommended Encore Acquisition (NASDAQ:EAC) announced a potentially value-enhancing action in the form of a publicly-traded Master Limited Partnership to distribute high income from its oil and gas resources. No further information has been disclosed except that unspecified properties would be included with Wyoming reserves newly acquired for $400 million from buy- recommended Anadarko (NYSE:APC).

An initial public offering of units is expected, perhaps by midyear. Today’s median McDep Ratio of about 0.80 for royalty trusts, four of which Encore’s chairman and founder had a hand in founding, suggests that the portion of Encore’s present value transferred to the MLP could have unlevered market recognition 40% higher than that implied by Encore’s low McDep Ratio of 0.54.

Thus, if half of Encore were to be dedicated to an income distributing entity the enhancement would be some 20% to total unlevered value and a higher percentage to equity value. That would help reverse direction for an out-of-favor stock trading below its 200-day average price for almost a year. Small cap EAC has a full weighting in our illustrative energy portfolio concentrated on real assets that promise a high return providing clean fuel for global growth.

EAC 1-yr chart:

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Tagged: , Aerospace/Defense - Major Diversified
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