Bottom of the Barrel: Drilling Into Energy Partners

NEW ORLEANS -- Do you think natural gas prices will remain strong as heating demand rises this winter? If so, then you might be interested in companies that drill in the Gulf of Mexico, the origin of more than one-third of domestic natural gas.

One small-cap way to play that theme is Energy Partners (EPL Quote). Sporting a $250 million market cap, this exploration-and-production company is looking to grow largely through opportunistic exploration and exploitation and through development of its prospects in the Gulf of Mexico.

An Interesting Story

"We are a Gulf of Mexico play," said Richard Bachmann, Energy Partners chairman, president and CEO, at a presentation Wednesday at the second annual Louisiana Energy Conference in New Orleans. "That is what we know, and that is our focus."

The company is an intriguing Gulf of Mexico growth story. It has about 45.6 million barrels of oil equivalent in its portfolio, with production of about 17,700 barrels a day in the Gulf of Mexico. Its current production is about 52% oil and 48% gas, but its future is more in natural gas.

Energy Partners (EPL:NYSE)
Current Price	$9.15
52-Week Range	$9.45-$5.60
Market Cap	$258.7 million
Average Daily Volume	22,545
Inst. Ownership	14%
Dividend Yield	None
Beta	0.68
Company Web Site	www.eplweb.com
Source: Value Line, company reports, TSC research

Last year, Energy Partners came out swinging with its purchase of Houston-based Hall Houston, an aggressive and successful pure E&P company. From its inception in 1983, Hall Houston drilled 275 wells in the Gulf of Mexico with an 80% success rate. The acquisition merged the lower-risk, shorter-term reward prospects of Hall Houston with the more speculative, yet large potential reward prospects of Energy Partners.

In short, it created a mix of projects that could provide good near-term cash flow with potential longer-term impact, something many Gulf of Mexico E&P companies are looking for amid today's declining production and diminishing prospects.

The combined companies hope to increase production and reserves by about 30% through both low-risk exploitation and production, about 65% of the company's capital budget, and higher-risk exploration. Its 2002 exploratory program shows how serious Energy Partners is about growth through exploration. By the end of the month, the company will have drilled 17 wells in the central Gulf of Mexico, with reserve potential equivalent to 400 billion cubic feet of natural gas.