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EPL Oil & Gas Inc.

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EPL Oil & Gas Inc. (EPL) has been using acquisitions to expand its presence in the Gulf of Mexico (GoM). Higher crude prices and increased production have been a boon for this Zacks #1 Rank (Strong Buy) independent energy exploration company, whose earnings are expected to rise strongly in 2012 and 2013. EPL – previously known as Energy Partners Ltd. – is not just a growth stock though, as it also exhibits value with a forward P/E of just 11.4 and a price-to-book (P/B) ratio of 1.5.

Record Liquids Output Drives Strong 2Q

EPL reported second quarter 2012 adjusted earnings per share of 52 cents on August 2, beating the Zacks Consensus Estimate of 46 cents by 13% and the year-ago profit of 33 cents by 58%. Revenues of $99.3 million were up 7% year over year from $92.8 million, surpassing the Zacks Consensus Estimate of $97.0 million.

Results were driven by record liquids volume (oil and natural gas liquids), which was up roughly 18% year over year to 9,768 barrels per day (Bbl/d). EPL’s output growth can be attributed to solid performance from the ongoing rig activities.

Recent GoM Acquisition Adds to Long-Term Reserves/Production

On September 17, EPL agreed to acquire certain shallow water GoM assets from privately-held Hilcorp Energy GOM Holdings LLC for $550 million. The transaction – expected to close by October 31 – will increase EPL’s proven reserves base by almost 100% to roughly 74 million oil-equivalent barrels (BOE), while boosting daily production by some 80% to more than 20,000 BOE. According to EPL, the Hilcorp assets hold an estimated 36.3 million BOE in proved reserves (54% oil, 40% proved developed) and are currently churning out around 10,000 BOE per day - about half of which are oil.

Earnings Set to Move Up Sharply

Based on the success of the company’s acquire-and-exploit policy, analysts are predicting strong earnings growth for EPL over the next couple of years. The 2012 Zacks Consensus Estimate of $1.81 represents earnings per share growth of 60% over 2011. The Zacks Consensus Estimate for next year is $3.09, corresponding with 71% growth.

Valuation Picture

Shares of EPL have soared in 2012, but remain cheap as earnings estimates also went up. In addition to trading around 11.4 times forward estimates (under the S&P 500 average of 14.2), the company has a price-to-book (P/B) ratio of 1.5, which suggests that the stock is still undervalued. (A P/E below 15.0 and a P/B ratio under 3.0 generally indicate value.)

Market Performance & Technicals

On the performance front, EPL’s share price has comfortably outperformed the S&P 500 year-to-date and has delivered a return of around 40% during the period, versus just 15% for the benchmark.

Below one can see the long-term earnings trend for EPL. Analysts are increasingly bullish on the company, which is reflected in their earnings estimates. In particular, with the price and consensus chart demonstrating incrementally increasing consensus estimates for fiscal 2012 and 2013, shares could keep climbing higher.

EPL is a GoM-focused upstream player that has attractive value characteristics and remains well positioned to maintain a strong earnings growth trajectory in the near- to medium-term. It is engaged in the exploration and development of crude oil and natural gas resources in the U.S. GoM shelf off the coast of Louisiana. The company, based in New Orleans and Houston, is a smaller explorer with a market cap of $791 million.

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