While others brake, Energen hits gas

11/17/2008


  Recent Price
$29
  Dividend
$0.48
  Yield
1.7%
  P/E Ratio
6
  Shares (millions)
72
  Long-Term Debt as % of Capital
33%
  52-Week Price Range
$79.57 - $24.59

Some might call Energen ($29; NYSE: EGN) a natural-gas utility with a high-growth energy business as a kicker. Some might call it a natural-gas producer that also happens to operate a regulated business with steady cash flow. We call Energen a Long-Term Buy, as the stock seems likely to deliver attractive returns over the next 24 to 48 months.

Energen’s energy operations aren’t as risky as those of most pure plays, as the company prefers to limit exposure to commodity prices. In recent years, Energen has hedged 60% to 75% of estimated production. This practice limited profits when oil and natural-gas prices were soaring but also limited the pain from the recent energy sell-off.

Consensus estimates project roughly flat per-share profits this year and next year. Energen’s business mix and hedging policy limit the downside from those estimates, and the company seems capable of exceeding expectations if the environment improves even modestly.

Plenty of energy
Energen Resources, the oil-and-gas production unit, currently generates more cash than it needs to fund capital projects and dividends, though in the past it has often drawn on the utility’s cash flow. The company deployed $84 million of its excess cash to pay off debt in the nine months ended September. Energen forecasts excess cash flow of up to $200 million in 2009 and organic production growth of 5% at the resources unit. For 2009, Energen has hedged 62% of its expected production at prices higher than current spot prices — natural gas is hedged at an average of $8.89 per thousand cubic feet, versus the spot price of $6.71.

While Energen’s hedging limits downside to profits, the hedge is not complete. As such, the company should share in any benefit from rising energy prices. Futures markets project a rise in both natural-gas and oil prices over the next two years. Energen also reduces risk operationally by purchasing land with proven reserves. This strategy has led to a 98% drilling success rate.

Company targets for production and profits do not include the effects of a project to tap natural-gas deposits beneath shale formations in Alabama. The company has said little about the test program in recent months but should announce results before year-end.

Gas-driven growth
The production segment has fueled much of Energen’s growth in recent years. In the nine months ended September, profits from the energy business rose 12%, versus 4% growth for the utility excluding a special charge in the year-earlier period.

In October, Energen reduced its 2009 per-share-profit guidance, projecting $3.70 to $4.10, down from the $4.35 to $4.55 expected for 2008. However, Energen increased its capital-spending target for 2009 and could benefit from lower costs as other energy companies cut their production spending. Energen’s estimates assume low prices for natural gas and oil — well below consensus 2009 prices — suggesting plenty of upside potential.

Energen, trading 65% off its June high, is attractively valued at less than seven times projected 2009 earnings of $4.31 per share, well below the average of 10 for the five energy/utility hybrids we track. An annual report for Energen Corp. is available at 605 Richard Arrington Blvd. N., Birmingham, AL 35203; (205) 326-2700; www.energen.com.


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