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EPL Oil & Gas Inc (EPL), Stone Energy Corporation (SGY): Here Is Why I Don’t Put This Offshore Player on My Buy List

Increasing Debt: The company’s long term debt was $700 million while equity was only $576 million equity as of March 2013. Furthermore, assuming the best case scenario materializes and the annual operating cash flow hits $400 million for 2013, the D/CF ratio will be close to 2x. Although this D/CF multiple isn’t alarming, it isn’t low either.
Overreliance on GOM: The company fully relies on GOM and doesn’t own any properties onshore North America or elsewhere. It is unknown to what extent the production will be affected if something goes wrong with EPL’s operations in GOM either due to external factors or due to some operational hiccups.
Acreage Expansion: During Q1 2013, EPL was the high bidder at $2.1 million on five leases comprising 13,892 acres in the shallow GOM shelf. Given the assets are near EPL’s existing acreage, there’s likely to be several synergies both in costs and in the company’s ability to quickly digest forthcoming seismic data.
Active Acquisition Program: Thanks to its liquidity and free cash flow generation, EPL will continue its “acquire and exploit” strategy, targeting additional acquisitions in order to accelerate its growth. The company’s plan consists of oil-dominated development and exploration activities, which are intended to drive production and revenue growth along with organic reserve replacement.
Natural Gas Potential: EPL is currently focused on oil, but it also has 10 gas projects ready to go as soon as pricing gets more favorable. This suggests additional opportunity for shareholders if natural gas prices continue higher, given nearly 40% of the company’s reserves are natural gas.
Commodity volatility: A significant part of EPL’s total production is unhedged, and the company’s cash flow is heavily impacted by oil prices. A sustained drop of the oil price during the remainder of 2013 will affect negatively both the operating and the free cash flow.
Gulf Coast costs and risks: As long as EPL produces all its hydrocarbon resources from the GOM, it incurs high seasonal maintenance costs for its platforms. Moreover, its production is exposed to unpredictable weather that can cause pricey damages. Remember how badly Hurricane Isaac and Katrina hurt the GOM players?
Foolish roundup
I believe that EPL has run its course for 2013 and has limited upside from the current levels. EPL can get cheaper before it gets more expensive due to the fact that it already trades at a significant premium and there aren’t any major positive catalysts ahead.

Nathan Kirykos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
Nathan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Here Is Why I Don’t Put This Offshore Player on My Buy List originally appeared on is written by Nathan Kirykos.

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