Here's Why EP Energy Corp's Stock Plunged 22.3% in January

By Matthew DiLallo Markets Fool.com

What happened

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Shares of EP Energy (NYSE: EPE) sank last month, dropping more than 20% on the heels of several analyst downgrades and somewhat disappointing outcomes from initiatives to shore up its financial situation.

So what

EP Energy got tripped up to start the year after an analyst from Citi downgraded the stock from neutral to sell while cutting the price target from $6 to $5. The analyst cited the company's weak balance sheet, noting that an anticipated $300 million of interest expense this year would impact its ability to operate.

Image source: Getty Images.

A few weeks later UBS followed with a downgrade of its own, also cutting the stock to sell while reducing its price target from $4.50 to $4. Again, the company's balance sheet was the driver of the downgrade, which the analyst thought would weigh on growth going forward.

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EP Energy seemed to spend the rest of the month working on initiatives to improve its financial situation. One of the highlights was an agreement with a company affiliated with Apollo Global Management (NYSE: APO) to finance development in the Permian Basin. The Apollo-controlled entity will spend $450 million to participate in the development of up to 150 wells, funding 60% of the drilling costs in exchange for a 50% interest in the joint venture wells. The deal implies a value of $20,000 per acre, which is well below where Permian acreage had changed hands recently. For example, Parsley Energy (NYSE: PE) has completed several deals across the Permian over the past year, paying as much as $44,000 per acre. In fact, just this week Parsley Energy paid $2.8 billion for more land at an average price of $40,000 per acre.

There are two potential reasons why EP Energy did not fetch quite as high a price as others in the basin. One possibility is that its acreage could just be lower-quality land. However, it is also worth pointing out that Apollo Global Management owns a 45% stake in EP Energy, which might have had an impact on the price. Either way, investors were less than enthused by the terms of this deal.

The final straw for many investors was EP Energy's decision to raise more debt at the end of the month. The company initially announced intentions to offer up to $600 million of new senior notes due in 2025 to repay a term loan due in 2021. However, it would go on to upsize the offering to $1 billion, pricing it at a yield of 8%. Those funds would provide the company with the capital to consolidate its balance sheet by also repaying some of its 2020 notes and its senior credit facility.

Now what

On the one hand, EP Energy made some progress toward improving its financial situation by signing a joint venture agreement and raising new debt to refinance its balance sheet. However, the company's acreage did not fetch as high a price as other recent deals, and it paid a hefty price for the refinance. Those outcomes reminded investors that EP Energy's financial and resource positions are not as good as rivals like Parsley Energy, which is growing rapidly in the current environment while EP Energy is still trying to get back on its feet.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.