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Energy Partners Ltd. (EPL) - Post Bankruptcy Turnaround

|Includes: EPL Oil & Gas, Inc. (EPL)

EPL is a post-bankruptcy company involved in oil and gas exploration and production in the Gulf of Mexico. It got into financial trouble in 2008 due to (1) hurricane activity (2) a sharp decline in oil and gas prices (3) its debt came due at a time when global credit markets were frozen and (4) a long history of poor capital allocation by management. The Company went through a quick, pre-negotiated bankruptcy in which it equitized a significant portion of its debt to reduce leverage. It emerged from Chapter 11 in September 2009.

Due to the restructuring, the Board is now controlled mainly by shareholders and old management has been replaced. Since its emergence from bankruptcy, the Company has made good progress in reducing costs and improving productivity. Oil prices have also helped valuation, while natural gas prices have offset some of that benefit.

The stock continues to trade at a discount to comparable companies. At parity, EPL would be at $17 per share.

Catalysts:

(1) The stock is underfollowed by the Street with zero sell-side coverage (2) bankruptcy taint, which takes time to wash and (3) the new management will need to prove that it can do a better job in capital allocation, which pre-bankruptcy, was one of the worst in the industry.

On April 8, 2010, Energy Partners issued a press release. Here is the gist of it:

"The Company reported probable reserve estimates based upon estimates provided by its third party engineering firms totaling 9.2 million barrels of oil equivalent (Boe) as of year-end 2009.

The estimated probable reserves are concentrated within its Gulf of Mexico Shelf core assets in the East Bay and South Timbalier areas, and are comprised of 75% oil and 25% gas.

Eighty-six percent of the probable reserve estimates are associated with proved developed reserves that will require production performance of the proven reserve base before being considered for proved classification, with the remainder requiring additional capital investment to test the estimated unproven reserve quantities. Additionally, the probable reserve estimates as reported are unrisked quantities."

I am inclined not to add these probable reserves in my valuation of EPL. However, this is certainly a positive, assuming that management will cost-effectively convert these into its proved reserve base of 31.2 MBoE.

In the peer group, which I use to gauge relative valuation of EPL, I include nine other Gulf of Mexico E&P Companies. The only Company which has oil/gas mix in its proved reserves similar to Energy Partners' is Callon Petroleum (NYSE:CPE) at 67%/33%. CPE is trading at EV/PV-10 of 3.6x versus EPL at 1.5x.

Of course, this comparison does not take into account the profile of each company's potential assets, only proved assets.

Another important fact about EPL which I like is its low balance sheet leverage. We tend forget about risk in good times, but commodity prices can turn on a dime so in my view, this is a critical metric. EPL has net debt of $1.62 per MBoE versus peer group median of $6.70 per MBoE.

Disclosure: Long EPL