Please ensure Javascript is enabled for purposes of website accessibility

Why Eagle Rock Energy Partners. L.P. Might Keep Plunging

By Brian D. Pacampara, CFA – Feb 28, 2014 at 10:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Eagle Rock Energy Partners (NASDAQ: EROC) slipped almost 1% in pre-market trading Friday after Wells Fargo downgraded the natural gas processor from outperform to market perform.

So what: Along with the downgrade, analyst Praneeth Satish lowered his price target to $5-$6 (from $7-$8), with the midpoint representing about 9% worth of upside to yesterday's close. While contrarians might be attracted to the stock's steady slide over the past year, Satish thinks that Eagle Rock's upside remains limited given the company's seemingly lackluster growth prospects and worrisome trend of rising costs.

Now what: According to Wells, Eagle Rock's risk/reward trade-off isn't too attractive at this point. "Although we continue to expect EROC's balance sheet to improve meaningfully following its transaction with RGP and the partnership to re-lever its balance sheet with a debt-financed acquisition, we now anticipate accretion from this acquisition would be used to bring EROC's coverage ratio back to approximately 1.0x rather than support a distribution increase (i.e. our prior thesis)," noted Satish. "Consequently, as a low-to-no growth, natural gas-focused upstream MLP, we believe EROC could trade at an 11.5% yield (implies a valuation of approximately $5.20 per unit)." With Eagle Rock already off more than 50% from its 52-week highs and boasting a near-12% dividend yield, however, now might not be the most opportune time to bail.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.