For Enerplus Corp. (ERF), 2013 has been a successful transition year. The company has been able to shift assets and production towards the Bakken and Marcellus shale plays and away from its legacy assets in Canada. The market has rewarded the stock, sending shares higher nearly 40% YTD not including dividends. Enerplus currently pays a $0.09 per share monthly dividend and yields about 5.70%.
Q3 2013 Overview
Net Income: $34.0M
Funds from Operations: $196M
Oil and Gas sales per BOE: $53.61
FFO per BOE: $24.31
Net Debt: $965M
On November 8, Enerplus reported its Q3 2013 results. For the quarter, the company posted production of 88,000 BOE/D, up 8% from prior year levels. Production from North Dakota was up nearly 20% to a record 18,000 BOE/D, exceeding previous guidance. Enerplus posted its best quarterly FFO in nearly two years at about $196M, or $0.98 per share, up 45% from prior year levels.
Of special note was that Enerplus' adjusted dividend payout ratio fell to below 100%, which may indicate future sustainability. Enerplus' improved operating results boosted its debt to FFO ratio to 1.20X, a large improvement from 1.90X last year.
Enerplus has assets and production located both in Canada and the US. As of September 30, the production mix was tilted towards Canada at about a 55/45 ratio. However, US based production has been growing much faster and is likely to surpass legacy output from Canada in a few quarters. In terms of capex, Enerplus has a 2013 budget of about $685M with the vast majority focusing on liquids (oil and NGLs) and US based natural gas. Estimated 2013 production is expected to average 89,000 BOE/D with an exit production target of 95,000 BOE/D by December. When adjusted for asset dispositions and using the midpoint for FY 2013 production, Enerplus is estimated to grow its production by 7% from prior year levels.
For 2014, Enerplus now estimates that it will increase production by about 10% to between 96,000 BOE/D and 100,000 BOE/D. Of note, crude oil production is expected to increase 12% while the mix between liquids and natural gas is expected to be nearly 50/50 by year-end 2014. This is a large improvement from the 60/40 split for early 2013. Capital spending is planned at $760M, a 11% increase from 2013 levels, with about two thirds directed towards crude oil investments. This increase in capex spending is likely due to improved performance from US based drilling operations.
In the Bakken and Three Forks area, Enerplus currently has a two rig program and is expected to complete 20 net wells in 2014. The Bakken continues to be a key area of production growth for Enerplus and is especially important considering most of the production there has been oil focus.
FFO growth has accelerated due to a larger focus on liquids
For Enerplus, funds from operations, or FFO, has been growing at a faster pace than implied by production growth. The cause is due to growing amounts of higher margin oil production. For 2013, FFO is expected to be about $764M, up 19% from prior year levels. As a result, Enerplus' adjusted dividend payout ratio has improved to about 103% for the year. This is quite the turnaround for the company. Back in 2012, Enerplus was actually forced to lower its dividend due to increased capex needs and lower natural gas prices. For 2014, Enerplus' dividend payout ratio is expected to worsen to about 120%. However, this is due to the large increase in capex spending. As in prior years, Enerplus is likely to engage in some form of Canadian asset dispositions to partly fund its US growth capex needs.
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Final Thoughts and Conclusion
Enerplus has clearly turned the corner this year. Looking at nearly all the metrics, the company now appears to be in a much better financial shape. I would however caution that Enerplus still remains highly indebted and that its dividend payout ratio remains sky high. The company will need for WTI prices to remain above $85 per BBL to secure an adequate IRR for its well inventory and current production. That being said, the shift towards the Bakken and Marcellus shale seems to have worked out quite well for Enerplus.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.