Encore Acquisition Company (EAC): Strong 1Q and clear signs of unbooked resource potential; Buy - Goldman Sachs - May 08, 2008
News
Encore reported adjusted 1Q2008 EPS of $1.08 versus our $0.99 and consensus of $0.87. Production was 38.2 MBOE/d, above both our 37.6 MBOE/d estimate and the 38.0 MBOE/d upper end of guidance. Operating cash flow was $167 mn versus our $129 mn estimate. Management issued production guidance for 2Q2008 of 37.5-38.9 MBOE/d versus our 38.2 MBOE/d estimate. Management announced improved recoveries from Bakken (ND) and Bell Creek (MT) wells, 10,000 net acres of exposure to the Haynesville play (LA) and a 208,000 acre position and initial signs of oil in the Tuscaloosa Marine Shale (MS/LA).
Analysis
We believe Encore’s results were positive across the board. Consistency of production versus guidance in recent quarters reflects management’s restructuring in 2007, while the company continues to move into new plays for which we believe the shares receive little recognition. Encore’s Bakken and Madison drilling programs, combined with low decline rate production from the Cedar Creek Anticline and growth from the gas joint venture with ExxonMobil in West Texas should continue to lead to lower-risk growth in future quarters. Encore is highly levered to higher crude oil prices. While more details are needed (such as well costs and declines) to assess the potential from the Tuscaloosa Marine Shale, the initial production rate of 150-200 bpd from the first well appears positive.
Implications
Encore trades at 5.4x 2009E EV/debt-adjusted cash flow, vs. 6.1x for long-lived peers. We believe very little value is imputed in Encore shares for unbooked resource potential. Increasingly, we believe the Street will begin to give Encore credit for its Bakken, Madison and Haynesville positions, let alone if there is any success at the Tuscaloosa Marine Shale. Encore is Buy rated versus our Attractive coverage view, and we see 30% upside to a $65 12-month DCF-based target price (commodity price volatility, drilling results, cost pressures and government pronouncements are key risks). |
