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Re: frenchee post# 9

Friday, 08/22/2008 6:16:23 PM

Friday, August 22, 2008 6:16:23 PM

Post# of 22
We forecast revenue growth of 8.2% this year.
We expect EGN to benefit from projected 14%
growth at its Energen Resources unit, helped by
higher realized prices. EGN's high level of
hedges locks in a good portion of its revenues
in 2008 and 2009.We see utility revenues rising
by 1% this year on customer growth and less
mild weather, offset by customer conservation.
ä Our 2008 operating profit margin forecast is
36.5%, up from 36.4% in 2007.We expect a drop
in per-revenue cost of gas, partly offset by a
slight increase in per-revenue operating taxes
and depreciation and depletion expense.We
expect that EGN will maintain control over
growth in other operating expense categories.
We see 2008 pretax margins of 33.6%, up from
33.2%, as we expect lower interest expense offset
by slightly lower non-operating income.
ä Assuming an effective tax rate of 36.4% and no
share repurchases, we project 2008 EPS of
$4.58, up 7.0% from 2007's $4.28. Our 2009 EPS
forecast is $5.23, an increase of 14%.
Investment Rationale/Risk
ä In our view, EGN continues to successfully execute
an exploration and production expansion
strategy backed by strong production hedges
and stable utility performance. EGN has hedges
covering 75% of remaining 2008 and 61% of
2009 production. EGN should continue to benefit
from high oil and gas prices.We think its
strong cash flows provide the company with
opportunities to grow through acquisitions and
development of long lived reserves, while funding
share repurchases and debt reductions.
ä Risks to our recommendation and target price
include prolonged declines in natural gas
prices, an inability to reduce debt levels, higher
interest rates, and a weakening financial condition.
ä The stock recently traded at about 11.9X our
2009 EPS estimate, or a 24% discount to its natural
gas utility peers. Our 12-month target price
of $81 implies a valuation of 15.4X our 2009 EPS
estimate, a 19% discount to our peer target. In
our view, EGN has a greater reliance on acquisition-
fueled growth, which we think is partly
offset by the EPS gains we see, the company's
proven hedging track record, and stable utility
results.


Regards,
frenchee

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