Today Ford Equity Research Report Editor Richard Segarra recommends an oil and gas company with growth and value characteristics.
“EPL Oil & Gas, Inc. (EPL, NYSE) operates as an independent oil and natural gas exploration and production company. The company’s operations are concentrated in the U.S. Gulf of Mexico shelf focusing on state and federal waters offshore Louisiana, which it considers its core area. As of Dec 31 2011, the company had estimated proved reserves of 37.1 million barrels of oil equivalent, of which 74.0% were oil and 91.0% were proved developed. As of Dec 31 2011, the company had working interests in 25 producing fields located in the Gulf of Mexico shelf region.
“We project that EPL will strongly outperform the market over the next 6 to 12 months. This projection is based on our analysis of three key factors that influence common stock performance: earnings strength, relative valuation, and recent price movement.
“Earnings strength is very positive. EPS increased from $1.54 to an estimated $2.94 over the past five quarters indicating an improving growth rate. Analyst forecasts have recently been raised. The company recently reported better than expected
results.
“Ford’s earnings momentum measures the acceleration or deceleration in trailing 12 month operating earnings per share growth. The upward curvature of the plotted points in the graph below indicates that while EPL Oil & Gas Inc.'s earnings have increased from $1.54 to an estimated $2.94 over the past 5 quarters, they have shown strong acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates an improvement in future earnings growth may occur.
“Relative valuation is very positive. EPL’s operating earnings yield of 9.7% ranks above 91% of the other companies in the Ford universe of stocks, indicating that it is undervalued. Ford measures the relative valuation of each company against all
other companies in our research universe. Operating earnings yield, an earnings-to-price ratio based on the last three quarters of operating earnings and the current quarter’s estimate, has proven to be the most reliable relative valuation measure. A
stock may stay undervalued or overvalued for a long period of time. For this reason, it is important to combine this factor with shorter-term predictive factors such as earnings momentum or price momentum to identify more imminent valuation adjustments.
“Price movement is very positive. EPL’s stock price is up 92.8% in the last 12 months (very positive), up 18.3% in the past quarter (very negative) and down 6.8% in the past month (very positive). This historical performance should lead to above average price performance in the next one to three months.
“Reiterate Strong Buy.”
Richard Segarra, CFA, Ford Equity Research, 800-842-0207, www.fordequity.com, 5/31/13