Encore Acquisition Company (EAC): 3Q2007 execution positive; continuing this is key to outperformance - Goldman Sachs -
11/01/07
What's changed
Encore reported 3Q 2007 adjusted EPS of $0.45 versus our estimate of $0.51 and consensus of $0.46. Total production was 222 MMcfe/d versus our 214 MMcfe/d estimate. Operating cash flow was $112 million, above our estimate of $93 million. Proceeds from the MLP offering were used for debt pay-down, and current net debt/tangible capital is 54%.
Implications
We rate Encore Neutral relative to an Attractive coverage view. We believe the stock can outperform if management can, as it did during 3Q 2007, meet or exceed its production guidance. Relative to other E&Ps, Encore's production mix remains more biased towards oil, where we remain bullish though see some potential for a temporary pullback in the near term. We expect a step change in oil exposure in 2008 when 3,000 b/d (10.6% of oil production) of legacy swaps at $37 per barrel roll off. Operationally, results from the West Texas joint venture with Exxon, the Cedar Creek Anticline and properties acquired this year from Anadarko are key catalysts for the share, in our view.
Valuation
Encore shares trade at 6.2X 2008 EV/debt-adjusted cash flow, in line to slightly below with other long reserve life conventional E&Ps. We believe relative valuation can continue to improve if management can successfully deliver its production and cost targets, something achieved in 3Q though not always consistently in prior periods. We see 17% upside for Encore shares to a 12-month discounted cash flow based target price of $41, broadly in line with upside for other E&Ps.
Key risks
Commodity price volatility, drilling results, costs of High Pressure Air Injection and secondary/tertiary recovery are key risks. |
