Encore Acquisition Company (EAC): Momentum building from narrowed focus, improved consistency - Goldman Sachs - February 19, 2008
What's changed
Encore reported 4Q2007 adjusted EPS of $0.93, higher than our estimate of $0.71 and First Call consensus of $0.62. Production was 225.2 MMcfe/d versus our 221.3 MMcfe/d. Operating cash flow was $135 million versus our estimate of $117 million. Total costs were $6.32 per Mcfe versus our $6.17 per Mcfe. Net debt/tangible capital was 53%. We are adjusting quarterly and full-year EPS estimates to reflect the effects of changes to production estimates, costs, and minor other company adjustments.
Implications
After struggling to meet production guidance prior to 2007, Encore has met or beaten guidance in recent quarters, which we attribute to greater conservatism and increased contributions from recent acquisitions and partnerships in the Rockies and West Texas.
Catalysts for the company include:
(1) exploration and development in the Bakken/Williston Basin;
(2) growth potential from joint ventures in West Texas; and
(3) further potential drop-downs to its MLP.
Going into Encore’s March 4 analyst meeting, we believe Street expectations are low. We see the meeting as a potential positive catalyst, as we see the potential for greater Street confidence in execution following Encore’s restructuring.
Valuation
Encore shares trade at 6.1X 2008 EV/debt-adjusted cash flow, a discount to 6.4X for Pioneer Natural Resources, 6.5X for Berry Petroleum, 8.8X for Cabot Oil and Gas and 6.2X for EXCO Resources. We see 23% upside potential to our $42, 12-month target price, based on a discounted cash flow analysis of proved reserves and selected unbooked resource. Our Neutral rating on Encore relative to an Attractive coverage view reflects our preference for more natural gas-focused E&P stocks.
Key risks
Commodity price and regional differential volatility, drilling results, cost pressures and government pronouncements are key risks for Encore. |
