Enerplus – A misunderstood energy producer

Enerplus is an independent North American oil and gas exploration and production company. The company was Canada’s first oil and gas royalty trust established in 1986. Its portfolio of assets consists of North American oil and natural gas assets including light oil assets in the Williston Basin, Marcellus natural gas shale play and oil assets in western Canada. Most of Enerplus’ oil and natural gas property interests are located in the U.S. in North Dakota, Montana, Colorado, and Pennsylvania, as well as in western Canada in Alberta, British Columbia, and Saskatchewan.

Enerplus derives more than 80% of its revenues from the U.S. and the rest from Canada. Liquids comprise 56% of the product mix while natural gas accounts for 44%. The company has a production capacity ranging in between 94,000-100,000 BOE/day. Enerplus benefits from its strategic concentrated position in the Bakken core which will still have more than 10 years of drilling inventory, even if proceeding at the current rate. Enerplus transports its crude oil production through an extensive network of pipelines and trucks to its buyers.

Investment Data

Revenue Growth & Market Exposure

Enerplus’ U.S. crude oil properties produced an average of ~43,600 BOE/day (or 47% of its average daily production) in 2018, up 36% YoY. The Marcellus shale gas production averaged ~37% of its total average daily production. The company enters into long-term agreements for crude oil, natural gas and NGL production from these properties which provides cost certainty and access to major Gulf Coast and key markets. Total Canadian crude oil properties production accounted for 11% of its total average daily production. Enerplus’ crude oil and NGLs production is marketed to a diverse portfolio of intermediaries and end users.

The company has been transitioning its assets to focus more on unconventional and organic growth opportunities. It develops high-quality assets capable of creating long term shareholder value. It also focuses on acquiring an increased interest in low-risk, high-quality reserves at a discount.

Enerplus has a proven history of maintaining strong well performance at lower costs. The company’s strong expertise grants it a competitive edge over peers and helps it to deliver significant capital efficiency gains. As a result of strong efficiencies, lower costs and optimizations, well costs have already reduced by ~10% compared to 2018 levels. Additional pipeline projects further support pricing.

Enerplus is targeting annual liquids production to grow at 10% to 13% in 2020-2021 driven by development in North Dakota. The company has delivered a total production growth of 10% and liquids growth of 22% in 2018 and is expecting 9%-10% annual liquids growth in 2019. It has also guided average annual production of 100,000 to 101,000 BOE/day for 2019. Enerplus is focusing on organic growth opportunities by developing good quality assets capable of generating competitive financial returns. The company is well placed to gain from returns-focused oil growth, positioned for free cash flow.

Dividends

Enerplus has a proven track record of disciplined capital allocation and strong returns. Though the company has an annual average dividend yield of just 1.4% and a very low payout ratio currently, it has been paying monthly dividends consistently year on year. The company expects to continue paying monthly dividends of $0.01 per share to its shareholders. A low payout ratio also signifies that dividend is comprehensively covered by earnings.

Enerplus has returned nearly $200 million to shareholders, year to date. The company has repurchased more than 24 million shares, representing ~10% of shares outstanding, since initiating buyback program. Its cash flow from operations has grown by 17% CAGR in the last three years.

The company has tightened its capital spending guidance to $625 million for the year 2019. With its Bakken new wells on stream program getting completed for this year the company is expecting its fourth quarter capital activity to be 30% lower sequentially and resulting in significant free cash flow. Enerplus’ low cost structure, improved realized pricing and strong capital efficiencies are expected to drive continued free cash flow generation in the future.

Enerplus’ capital efficient assets provides a platform for profitable growth and competitive financial returns. Its concentrated position in the Bakken core, high return oil production growth, consistent free cash flow generation and low financial leverage should also support future dividend growth.

Competition

The oil and natural gas industry is highly competitive. Enerplus competes with a large number of organizations, some of them not only explore, develop and produce oil and natural gas, but also conduct refining operations and market the products globally. Enerplus competes directly with Inter Pipeline and Pembina Pipeline, which are leading energy infrastructure companies in Canada. AltaGas, Encana Corp. and Keyera Corp. are other major Canadian energy companies. Given its long and rich experience in energy infrastructure, Enerplus has developed strong industry ties and is in a good position to access good locations and lucrative opportunities in the market. The company’s integrated footprint along oil and natural gas is capable of delivering sustained value to both shareholders and customers.

Bottom Line

Enerplus is in a good position to benefit from its capital-efficient and productive drilling inventory and an additional pipeline of projects to further support pricing. Its optimized portfolio focuses on high return and strong cash flow generating assets. Future projects are expected to drive attractive long-term growth per share and increasing demand for oil will also act as a strong tailwind for the company. High-margin growth positions Enerplus for accelerated free cash flow which should support future dividend payments.

ERF vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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