Here’s the rub. Even if normal operations resume, low natural gas and natural gas liquids prices will hamper the company’s revenues, a fact acknowledged by management. Further, the company’s cash flow has not covered its distributions and the company has limited cash on hand. Admittedly, the secondary stock offering helped its financial position. However, unless revenues and cash flow improve, funding both its current distributions and ongoing operations could prove difficult.
The ugly
While Eagle Rock had a bad quarter with potential to reverse its fortunes, Penn West Petroleum Ltd (USA) (NYSE:PWE) Exploration has had bad quarters with no reversal of fortunes. The company produces oil and natural gas primarily from western Canada. Since 2011, earnings, revenues and distributions have all declined. For the most recent quarter, production of oil and particularly natural gas declined from the same quarter a year ago. Gross revenue and earnings continued declining. Debt to cash flow runs approximately 3:1 with nothing to show for it.
To its credit, the company completed a strategic review that, among other things, cut the distribution from $0.27 to $0.14 per unit. Penn West Petroleum Ltd (USA) (NYSE:PWE) also announced a 10% reduction in its workforce. A new CEO has been named and insiders are buying stock. Take away problems seem to be disappearing as rail competes with pipelines for oil transportation business. Does this portend a long awaited turn around? Perhaps, but I would wait for tangible results before taking the investment plunge.
Final Foolish thoughts
For safe steady returns, Enterprise Products takes the prize. Its track record, trajectory and business plan all point to continued income and capital gains. Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) presents a dilemma. If the worst of its operational problems are behind it, capital gains and an enviable yield await investors. If the first quarter presages the rest of the year, Eagle Rock investors face distribution cuts and further reduction of their unit’s value. Investing in Eagle Rock is a risky bet management can keep operations online and growing enough to pay for capital and operational expenses while maintaining a hefty distribution.
The article Two Energy Companies to Consider and One to Avoid originally appeared on Fool.com and is written by Robert Zimmerman.
Robert Zimmerman has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P.. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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