One of the main energy producers in the U.S. Gulf of Mexico (GOM) is EPL Oil & Gas Inc (NYSE:EPL). EPL Oil & Gas Inc (NYSE:EPL)‘s operations are concentrated in the untapped reservoirs of the GOM shelf, focusing on the waters of offshore Louisiana. The stock has almost doubled over the last twelve months, making any prudent investor wonder whether
there is any upside left or the stock has run its course. To answer this, let’s check out the company’s strengths, weaknesses, opportunities and threats.
Strengths
Oil Production and Reserves Growth: Q1 2013 oil production rose 85% versus Q1 2012 to 17,327 barrels of oil per day (bopd), impacted by organic growth from ongoing operational activities and the first full quarter of production from the Hilcorp acquisition that closed late last year.
Last fall was transformational for EPL Oil & Gas Inc (NYSE:EPL) (NYSE:EPL) when it acquired GOM assets from privately held Hilcorp Energy for $550 million. The acquired assets included 36.3 million barrels of oil equivalent (MMboe) in proved reserves (54% oil and liquids), and over 10,000 barrels of oil equivalent per day (boepd) of production (50% oil and liquids). Overall, the deal doubled EPL Oil & Gas Inc (NYSE:EPL)’s proved reserves and added 149,000 net acres. This boosted EPL Oil & Gas Inc (NYSE:EPL)’s total net GOM acres to 331,000.
Cash Flow Growth: EPL Oil & Gas Inc (NYSE:EPL)’s shift from natural gas to oil has paid off. Since 2009, the company’s oil and liquids production has grown to ~80% of overall production, up from 36% in 2009, driven by the company’s focus on oil-weighted acquisitions and organic expansion.
As a result, cash flow from operating activities in the first quarter of 2013 was $78.2 million, a 37% increase compared to cash flow from operating activities for the same quarter a year ago. EPL Oil & Gas Inc (NYSE:EPL) also estimates that it will generate approximately $400 million in cash flow from operating activities in 2013.
Active Hedging Program: Most of the company’s operating cash flow for 2013 is protected because EPL has hedged ~60% of its total production.
Consistent Profitability and Satisfactory Profit Margin: The company’s crude oil is advantaged by receiving Heavy Louisiana Sweet and Light Louisiana Sweet crude oil basis differentials. This premium pricing has helped EPL remain profitable for several quarters in a row, with estimated 2013 EBITDAX to be in the range between $475 million to $525 million.
Strong liquidity: In April 2013, EPL sold certain interests in the non-operated Bay Marchand field to the property operator for total consideration of $62.8 million.
After giving effect to this sale, EPL’s current liquidity is $290 million. By year end, the company can increase its liquidity further thanks to its free cash flow, which is estimated to be $125 million for 2013.
Weaknesses
Key metrics compared to peers: In Q1 2013, the company produced ~ 22,700 boepd (77% oil and liquids), holding 75.8 MMboe (~60% oil and liquids) after the latest asset sale mentioned above (Bay Marchand field).
Operating within cash flow and allocating $300 million for its 2013 capital budget, EPL estimates that 2013 annual production will remain at ~22,500 boepd (80% oil and liquids) by year end. After all, let the numbers speak for themselves:
| Company | EV (Billion $) | Production (boepd) | Proved Reserves(MMboe) | $/boepd | $/boe |
| EPL | 1,85 | 22,700(77% oil/liquids) | 75.8(60% oil/liquids) | 81,500 | 24.4 |
| Energy XXI (NASDAQ:EXXI) | 3,18 | 50,000(60% oil/liquids) | 120(71% oil/liquids) | 63,600 | 26.5 |
| Stone Energy | 1,8 | 40,100(52% oil/liquids) | 129(49% oil/liquids) | 44,900 | 13.95 |
| W&T Offshore (NYSE:WTI) | 2,2 | 50,000(53% oil/liquids) | 117.5(60% oil/liquids) | 44,000 | 18.72 |
Based on these key metrics, EPL isn’t undervalued in comparison to Stone Energy Corporation (NYSE:SGY), W&T Offshore, Inc. (NYSE:WTI) and
