Enerplus (ERF) is one of the oil and gas producing companies with a balanced portfolio in both oil and gas. The company's total production of oil and gas is almost evenly split. It has major operations in North Dakota and North Pennsylvania, where it produces oil and gas. With plans in place to increase production from these assets, the company is on a growth path.
Laying the groundwork at Fort Berthold
Enerplus operates in the Williston Basin located in North Dakota and Montana. Within the Williston Basin, the company has two major assets located in Fort Berthold and Sleeping Giant. The Williston Basin has Bakken and Three Forks rock formations, from which oil and natural gas can be extracted. The Three Forks formation lies below the Bakken.
Fort Berthold is located in North Dakota. Enerplus has a net acreage of around 73,000 and operates wells at around 92 net locations in the region. Among these wells, 74 wells are located in the Bakken and 18 are located in the Three Forks. Enerplus currently produces around 15,000 barrels of oil equivalent per day, or boepd, from the Fort Berthold region. At Fort Berthold, the company has been able to achieve high productivity from one of its wells by using 37 frac stages. "Frac stages" is a technical term used in well drilling where the rock formation is fractured at multiple zones. The multiple fractures helps extract more oil and gas deposits from the same well, increasing well productivity. The initial production, or IP, achieved for 30 days from these wells in the Bakken formation is around 1,300 barrel of oil per day. IP is a metric that helps estimate the total production from a well. The company also achieved a production rate of around 1,000 barrel of oil per day from the Three Forks formation.
Enerplus plans to spend around $340 million, or 50%, of its capital expenditure for this year in the Fort Berthold region. The company plans to drill and complete around 20 - 25 net wells in the Fort Berthold region by the end of this year. Net well is the total number of wells, including wells the company has partial interest in. Among these wells, around 66% are planned in the Bakken formation, and the rest are planned in the Three Forks formation. The company expects to increase the production to around 18,000 boepd by the end of this year. The graph below shows the production growth from the Fort Berthold area YTD:
In the Fort Berthold region, the company has also identified locations for downspacing. Downspacing is the process of reducing space between two well locations, which results in an increase of productivity by increasing extraction from the reserves. Enerplus has identified potential for downspacing in the Middle Bakken and 1st bench Three Forks. Middle Bakken is one of the layers within the Bakken formation while 1st bench is one of the layers within the Three Forks formation. Enerplus has 130 net undrilled locations in the Fort Berthold region. Net undrilled locations take into account the total number of undrilled locations, including the locations where the company has partial interest. The possibility of downspacing will add around 150 net additional locations in the region and will add eight years of inventory to the company. The company is testing seven well spacing in the region.
We expect that Enerplus' transition to pad drilling will drive down cost in the Fort Berthold region. Pad drilling is a technique of drilling multiple wells at the same time, reducing the number of well drilling days. Currently, the company estimates the costs per well around $11.5 million. According to estimates of EIA, the cost of pad drilling of horizontal wells in the Bakken region can vary between $6.5 million and $9 million. Going forward into the next year, Enerplus can realize further gains from its pad drilling initiatives. The following graph shows the company's cost trend in drilling wells.
One of the foremost players in the North Dakota is Continental Resources (CLR). The company controls around 1.2 million net acres in this region and plans to spend around $2.5 billion in the region next year. The company has tested around 18 wells in the lower Three Forks formation, and it could find potential productive zones in the lower Three Forks to be around 3,800 square miles. Additionally, the company is carrying out three "160 & 320 acre pilot well density" programs in the Bakken formation and one such project in the lower Three Forks formation. The well density program is carried out in order to downspace the wells and maximize extraction from oil and gas reserves. The testing has enabled Continental to reduce well costs from around $12 million per well last year to around $8 million per well by the end of this year. While Continental has been able to bring down its well costs significantly, we expect the initiatives taken by Enerplus will reap similar results.
Another player in the Bakken is Oasis Petroleum (OAS), which has a net acreage of around 492,000 and a production of 43,000 boepd. Within an area of 1,280 acres, Oasis Petroleum is further planning to drill four wells in the Middle Bakken and four wells in the Three Fork formation, thereby reducing the well spacing in the given acreage. Oasis plans to increase the rig count from around 13 this year to 16 next year, with plans to increase production to around 60,000 boepd by 2015.
Benefits from improving natural gas environment
One of the primary drivers of growth for Enerplus is the Marcellus Shale gas. The company has around 41,000 net non-operated in north Pennsylvania. The production from this region averaged at around 83 million cubic feet per day, or mcfpd, for YTD. The company has 32 net wells currently in production and expects to drill or complete around 8-10 net wells by the end of this year.
Enerplus is carrying out major developments in this region in Bradford and Susquehanna counties. The Estimated Ultimate Recovery, or EUR, is from this region is between 6 - 12 billion cubic feet, or bcf. The EUR denotes the total recovery that could be economically possible from a well. The IP in these areas averages around 8 mcfpd with some wells reaching to around 20 mcfpd. IP is a metric that helps estimate production from a well over a period of time.
Enerplus is expected to benefit from the increase in production of natural gas. This is because of the increase in natural prices in the U.S. According to the EIA, the Henry Hub natural gas prices are expected to be around $3.17 per million British thermal unit, or mbtu, which increased from around $2.75 per mbtu. The natural gas prices could further rise to around $4 per mbtu next year. One of the reasons for the increase in natural gas prices could be the increase in export of natural gas from the U.S. Thus, with the increase in production, Enerplus stands to increase its revenue. The production from the Marcellus shale is shown below:
Has the fuel to fly high
Enterprise Value/Revenue, or EV/Revenue
Enterprise Value/EBITDA, or EV/EBITDA
The EV/revenue and EV/EBITDA of Enerplus are lower than that of both Continental and Oasis Petroleum. This is because the company has a diversified asset base from which it can produce both oil and natural gas. This allows it to take advantage of both the oil and natural gas markets. As we have seen, the company is developing its Fort Berthold assets to increase production. At the same time, the company's transition to pad drilling methods will lead to more cost savings. The company's projects in Fort Berthold are going to add revenue as well as increase margins from cost savings.
With the natural gas prices stabilizing by the end of the year and with expectations to increase in the next year, Enerplus stands to gain from its increasing production from the Marcellus shale. Currently, the company has an attractive valuation, given the potential growth it can achieve over the coming quarters. So, it's better to invest in this stock early and then watch it grow.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. 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.