By: Ahmed Ishtiaq
Enerplus Corp. (NYSE:ERF) has a diversified asset base of oil and gas properties across a variety of resource plays. The company owns oil and gas properties in both U.S. and Canada. Enerplus has conventional oil and gas assets throughout the Western Canadian Sedimentary Basin. A big plus for Enerplus is its diverse portfolio. The company explores and produces in shallow gas development, waterflood, and joint venture activities in Western Canada and the US Rockies. Enerplus is also developing coalbed methane, oil sands, and shale properties. In early 2011, the company converted to a corporation for better shareholder returns.
Enerplus is a hugely attractive investment for income investors due to its high dividend yield. The company had to cut its dividends in 2012, due to expected decline in cash flows. However, it is still one of the highest dividend payers in the sector and boasts an attractive dividend yield. Let's take a look at how the company will fare in 2013.
Dividends play a vital role in attracting investors towards Enerplus. At the moment, the company pays an annual dividend of $1.08, yielding 8%. An important aspect of the dividend payments is that the company pays monthly dividends. Monthly dividends are extremely attractive to investors who use dividend reinvestment program (DRIP). Monthly dividends provide the investors an opportunity to increase compounding periods and substantially augment the value of the investment.
Enerplus has made it clear that, despite slow growth the company expects to maintain its dividend. The company anticipated slow growth and reduced the dividends. Furthermore, the company will spend less in capital expenditures during 2013 than the previous year. A decrease in capital spending will augment the free cash flows. As a result, the company will have more cash to cover its dividend payments.
New Asset Acquisitions and Change in Focus
I have discussed in detail the sales of assets and overall financial performance of the company in my previous articles. The company is currently trying to shift its focus from natural gas to liquids. As a result, Enerplus is selling non-core assets and using the proceeds to pay its debt. Recently, the company announced the sale of its Manitoba assets for $216 million. Enerplus will lose 1,600 BOE/day in production due to the sale of these assets. However, Manitoba assets are categorized as non-core assets by the company.
Furthermore, Enerplus has bought assets in the Bakken area in Montana. Enerplus paid $119 million for the acquisition and the assets will add an incremental production of 1,550 BOE/day. At the moment, the company holds 90% interest in these operated leases. Enerplus has replaced the loss of production from the sale of Manitoba assets by reinvesting almost half the amount. The Montana assets have about 6.2 million BOE proved plus probable reserves. A shift towards the liquids will provide the company better protection against commodity prices. Low natural gas prices hurt the oil and gas sector in the last year, and the prices for natural gas are not expected to recover substantially. As a result, the companies are changing focus towards liquids.
Expectations about 2013
Energy sector will continue its slow growth during 2013, due to a tepid recovery in the global economic conditions. As a result, the company has lowered its capital expenditures for the year. However, the capital expenditures will be focused on liquids during 2013. The company will try to augment its liquids portfolio during 2013, and complete capital expenditures budget for the year on liquids. Furthermore, the company is expected to deliver a funds flow growth of about 11%, and debt-adjusted growth of 6%. During 2013, Enerplus will spend $685 million on capital expenditures, 20% less than 2012. In addition, the company has a target of 2% increase in the total production for the year. At the moment, the adjusted payout ratio of the company stands at 159%. However, due to decreased capital expenditures and an increase in funds flow; the adjusted payout ratio will come down to 130%.
Comparison with Peers:
Debt to Equity
Based on the forward P/E, Enerplus is trading at a discount compared to its peers. The stock is also attractive based on P/B and P/S ratios. All the participants in the industry recorded negative EPS growth and faced declining margins due to depressed commodity prices.
As I mentioned above, dividends are extremely important for Enerplus investors and the company realizes that. As a result, Enerplus focuses on maintaining its current dividend levels. I expect the company to maintain current dividend levels during 2013. Increased funds flow and decreased capital expenditures will free up substantial cash flows for the company. As a result, Enerplus will have no trouble maintaining its current dividends. Furthermore, improvement in funds flow and debt metrics will have a positive impact on the stock price. I believe Enerplus can prove be an extremely attractive investment over the next two years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.