Credit Suisse Initiates Energen At Outperform, $43 Target

Credit Suisse initiated Energen Corporation EGN with an Outperform rating and $43 price target on mixture of attractive valuation, balance sheet strength and large inventory runway.

"While 2016 activity was slowed considerably to preserve capital in a lower-for-longer price environment, even when factoring in a 2015 run-rate drilling program, inventory still totals ~34 years (~79 years given the 2016 completion rate)," analyst Mark Lear wrote in a note to clients.

The analyst said the Birmingham, Alabama-based Energen currently maintains an inventory of 2,504 net engineered locations in the Midland basin and 1,936 locations in the Delaware basin in West Texas.

Related Link: SunTrust: Energen Could Be About To Sell Delaware Property, Stock Will "Pop"

"While drilling activity in 2016 only calls for the completion of 46 horizontal DUCs (Drilled but UnCompleted), the drilling and completion of an additional horizontal well to complete a pad, and six vertical Wolfberry wells to hold acreage, the company also provided a capital range that allows for acceleration should commodity prices improve materially into 2H16," Lear said.

Rating And Price Target Justification

Following its balance sheet strengthening efforts and significant cuts to capex, the analyst estimates "2016 net debt/EBITDA of 1.9x at the futures strip, well below our coverage median at 3.9x."

On the valuation front, Lear noted that EGN currently trades at a 15 percent discount to his $43 target price ("compared to the group at a 15 percent discount"). "On a multiples basis, it trades at 18.0x 2016E EBITDA unhedged at the futures strip and 9.2x 2017E EBITDA hedged at the CS Deck versus our coverage at 15.0x and 8.0x, respectively," the analyst added.

"Relative to its Midland peers, EGN screens attractively with an implied acreage value of $16k/acre versus the median $29k/acre, on EV/EBITDA multiples, and on a NAV basis," the analyst highlighted.

"We would note that on 2016E EBITDA, EGN is currently trading at a ~3x multiple discount to the next Midland operator and a ~5x discount to the median of Midland operators under coverage. To be sure, most of the operators in the comparison will continue to grow production exit to exit this year versus EGN declining as DUC completions occur, which would bring multiples closer in line with EGN for 2017."

"However, the multiple contraction seen from EGN into 2017 still places the company near the middle of our universe despite having exposure to some of the best-in-class Midland and Delaware assets," Lear added.

At time of writing, Energen was trading down roughly 2 percent at $35.86.