UBS Downgrades EP Energy, Warns Of Debt Load And Declining Production

On Friday, UBS issued an update on EP Energy Corp (NYSE: EPE) after the oil holding company announced lower than expected 4Q volumes and FY2016 earnings guidance. Analysts at UBS downgraded EP Energy from Buy to Neutral and lowered their price target from $4.50 to $2.75.

William Featherston and Michael Ziffer, analysts at UBS, wrote, "EPE holds attractive positions in the Eagle Ford Shale & the Permian's southern Midland Wolfcamp & has proved itself as a strong operator with per well IP rates in excess of nearby peers in both plays. Unfortunately, its materially lower cash flow once hedges roll off next year and onerous debt load limits EPE's ability to maintain a capital spending profile sufficient to hold production level in 2016."

Related Link: Citi More Bullish On E&P Stocks En Masse

Key Takeaways

UBS gave two key takeaways on why they see weakness in EP Energy and downgraded the company:

1. Production Declines
With the amount of debt on EP Energy's balance sheet and recent declines in production, UBS believes that EP may not be able to continue to produce enough oil in the near term to remain a strong player in the oil market.

2. Reductions In Capital Expenditures
Analysts at UBS noted that EP Energy's capex is expected to be down 25–60 percent year over year. This was done in order to save cash and maintain company operations. However, with limited capital expenditures, EP Energy will have a difficult time growing either their top-line or profitability.

EP Energy last traded at $2.71.

Image Credit: Public Domain