Barclays Downgrades Jones Energy To Underweight, Sees Leverage Ratios Rising In 2017

Jones Energy Inc JONE would need to achieve significant improvement in its capital efficiency in order to justify the premium at which its shares are currently trading, Barclays’ Jeffrey W. Robertson said in a report. He downgraded the rating on the company from Equal Weight to Underweight, while reducing the price target from $3.50 to $3.

Jones Energy’s shares are currently trading at premium multiples to the “group of companies in our universe with comparable production growth profiles, leverage metrics, and operating margins,” analyst Robertson mentioned. He added, “We believe JONE would have to significantly improve its capital efficiency to justify the premium.”

Rising Leverage Ratios Through 2017

With Jones Energy’s higher-priced oil and gas hedges rolling off, the company’s leverage ratios would rise through next year, Robertson noted. He estimates net debt to LTM EBITDAX to rise 4.7x by yearend 2017, from 3.0x as of 2Q16.

“The company has locked-in ~$47mm in hedging gains in 2018/2019 that it could bring forward to remain compliant with its credit facility covenant (max of 4.0x net debt to LTM EBITDAX). On an unhedged basis (gains removed from EBITDAX and applied to net debt), we estimate a leverage ratio of 5.5x by YE17,” the analyst wrote.

Jones Energy is estimated to have had about $272 million of liquidity as of June 30 and is expected to record “a modest cash flow deficit in 2017 to maintain its capital program,” Robertson said.

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