BoA Downgrade: EP Energy's Haynesville Sale Won't Save It, Balance Sheet Still Has Troubles

BoA Merrill Lynch’s Jason Smith downgraded the rating for EP Energy Corp EPE from Neutral to Underperform, while reducing the price target from $3.50 to $3.00. Although the company has sold its Haynesville asset, balance sheet headwinds remain.

Haynesville Sale

EP Energy announced plans to sell all of its assets in the Haynesville shale in an all-cash deal to Covey Park Gas LLC. The transaction, valued at $420mm, is expected to close in 2Q16.

“Given a December Bloomberg article that implied EP Energy was looking to sell its Haynesville assets, we do not view the announcement as a surprise and see metrics as comparable to Encana’s Haynesville sale in 2015,” analyst Jason Smith wrote.

Balance Sheet Headwinds

EP Energy had $4.8bn of debt at yearend 2015. The Haynesville sale represents the company’s first step towards cleaning up its balance sheet, Smith commented. He added, however, that leverage could continue to be a headwind into 2017, when most of the company’s hedges roll off.

The analyst mentioned that it is difficult to “envision a scenario post 2016 where EPE can live within cash flow while moderating its production declines, barring a significant recovery in commodity prices.” He expects production to be down 23 percent in 2016, including the Haynesville sale, and down another 11 percent in 2017.