Eagle Rock Energy (EROC) Begins its Comeback as Pure Production/Exploration Play

Michael Teague |

Eagle Rock Energy Partners ($EROC) has had a rough 2013, with shares down some 35 percent on the year. Things began to look up on Monday, however, as the smallcap oil & gas company announced the sale of its midstream business to Regency Energy Partners LP ($RGP).

Shifting the Focus to Upstream

Investors unequivocally welcomed the move, with both stocks trading much higher throughout the session. But the deal is especially significant for Eagle Rock, as the shedding of its processing plants along with over 8,000 miles of pipeline assets turns the company into a pure exploration/drilling play. The company is prepared, if not long overdue, for this transition, as it sits on some highly valued acreage throughout the US, most notably in Texas’s Permian Basin.

Furthermore, given that the sum being paid out by Regency Energy, $1.325 billion, is nearly twice Eagle Rock’s enterprise value, and will allow it to both pay down debt as well as to invest more into new drilling and exploration efforts.

Shale Plays Provide a Bullish Outlook?

Aside from the wells the company is currently operating, nine of which went online over the summer, inflating production by about one-third on the prior year, it is sitting on about 16 acres of land in the Southern Central Oklahoma Oil Province (known in industry parlance as “SCOOP”). Unlike the majority of the company’s assets that are tied to natural gas, the SCOOP play is all about oil, with some estimates claiming that reserves could be somewhere in the neighborhood of 70 billion barrels.

Eagle Rock could wind up with more oil than it knows what to do with, and that is also a good thing, because the expected 2014 glut in natural gas supplies resulting from increased shale production will send prices lower.

By the closing bell, EROC finished the day 12.55 percent higher at $5.92 per share, while RGP was 7.77 percent higher to $26.07.

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