Energen's More Than Just A Utility

8/24/2009


  Recent Price
$42
  Dividend
$0.50
  Yield

1.2%

  P/E Ratio
11
  Shares (millions)
72
  Long-Term Debt as % of Capital
22%
  52-Week Price Range
$58.20 - $23.00

Even as Energen ($42; EGN) moved into more speculative ventures, namely energy exploration and production, it kept the mentality of a utility that values a stable revenue stream.

Witness the hedging program that has locked in prices for 70% of estimated 2009 production. In the June quarter, average realized prices fell 22% but would have fallen more than 60% without the hedges. For the remainder of the year, natural gas production is hedged at $8.34 per thousand cubic feet, more than double the current spot price. The price of oil now hovers about 5% below Energen’s average hedge price of about $70 per barrel.

Consensus estimates project profit declines in the September and December quarters, followed by a strong recovery in 2010. Energen boasts a solid balance sheet, rising earnings estimates, and an attractive valuation. The stock is a Long-Term Buy.

Milking the utility cash cow

Alagasco, the biggest natural-gas utility in Alabama, serves about 455,000 customers. Cash generated by the utility funds the dividend, raised in each of the last 27 years. The utility (44% of 12-month revenue) grew sales 8% over the past four quarters. Performance in the last two quarters is another story, with sales dipping 1%. Energen estimates that Alagasco will generate 15% of 2009 net income.

The nonregulated energy segment is a growth vehicle but can also be a liability, as it exposes Energen to the wild swings of natural-gas and oil prices. Sales for the energy business (56% of revenue) slid 4% over the past year and 15% in the six months ended June. Production rose 9% in the first six months of 2009, partially offsetting weak prices. Natural gas accounts for roughly 65% of production, with 25% oil and 10% natural-gas liquids.

An aggressive acquisition strategy targets properties in North America. In June, Energen completed a $182 million cash deal to gain an interest in the 13-acre Fuhrman-Mascho field in the Permian Basin, with a production history that stretches back more than 70 years. Other deals could unfold if energy prices remain low and more companies run into financial trouble.

Since it entered the energy business more than a decade ago, Energen has invested $3.6 billion in U.S. properties that contain 1.6 trillion cubic feet equivalents (Tcfe) of proved reserves and 1.9 Tcfe of probable or possible reserves. The San Juan Basin in New Mexico and Colorado accounts for 52% of the company’s proved reserves, followed by the Permian Basin (32%) in West Texas and New Mexico and the Black Warrior Basin (13%) in Alabama. Energen also owns fields in North Louisiana and East Texas. Natural gas makes up 62% of the proved reserves. Proved reserves reflect the amount of petroleum or natural gas the company is fairly certain can be extracted using current technology.

Conclusion

Energen shares trade at 11 times trailing earnings, 21% off the five-year average and 25% below the average P/E of 14 for energy/utility hybrids. The company faces tough sales and profit comparisons this year, and Wall Street expects per-share earnings to fall 23%. But estimates for both the current year and 2010 are rising in the wake of better-than-expected June-quarter results. An annual report for Energen Corp. is available at 605 Richard Arrington Blvd. N., Birmingham, AL 35203; (205) 326-2700; www.energen.com.

 

ENERGEN
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '09 $0.76 vs. $0.93 - 10% $41.62 -

$28.21

10 - 7
Mar '09 1.33 vs. 1.53 - 7% 33.91 - 23.18 8 - 5
Dec '08 0.91 vs. 1.10 + 7% 45.50 - 23.00 10 - 5
Sep '08 1.01 vs.

0.80

+ 20% 79.33 - 41.03 18 - 9
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $1.57 $4.38 $0.48 $79.57
-
$23.00 18 - 5
2007 $1.44 $4.28 $0.46 70.41
-
43.78 16 - 10
2006 $1.34 $3.16 $0.44 47.60
-
32.16 15- 10
2005 $1.13 $2.35 $0.40 44.31
-
27.06 19 - 12
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
95 71 90 83 90 75 58

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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