Enerplus (NYSE:ERF) has been performing well since the start of 2013 with around 38% growth in the stock price. The company's stock was trading at around $30 in the year 2011 and the whole year was golden for it. In mid 2012, the stock fell by more than 50% to $13 due to 50% reduction in the dividend payout ratio caused by losses of the company, ever since the company has been trying to get its old place in the market. Enerplus is one of the companies which pays out its dividends on a monthly basis and that makes it among the most sought after shares in the market for dividend hunters. However, its volatility is also high which makes it riskier for long-term investors and presents opportunities for speculative gains.
Increased cash in hand
If we look at the company's third quarter results, cash in hand is $17.26 million which is far better than the last year's figure of $4.9 million. If the company keeps heading in the same direction, much more dividend growth is expected than what they offered at the start of this month. Also, the long-term debt of the company has decreased significantly to about $880 million as opposed to the last year's figure of $962 million.. As the company gets rid of its long-term debt, it would free up the cash flows which would have been utilized as the cost of long-term debt, subsequently, increasing the cash in hand and thus, the dividends in the future. Moreover, the net profit margin will increase as the interest cost decreases. Although, higher profit margins do not mean higher dividends. It is sure to have a positive impact on the stock price as we have seen during the past year.
The current portion of the long-term debt of Enerplus, as opposed to the total long-term debt, has increased. This means that the cash flows in this period should be tight, relative to normal. Even then the company manages to give a 6% yield on the monthly dividend, so as this debt starts clearing up, we should expect more of the dividends in the coming years.
Enerplus has managed to bring down its operating expenses by 10.5% to $80.5 million in the third quarter as compared to the last year's expense of $89 million giving it a better operating profit. This year, however, the company did have too much luck getting decent gains on foreign exchange and the figure fell substantially. Even then, the company made a net profit of $32 million in the third quarter with its actual business as opposed to the net loss of $59.79 million it made in the same period of the previous year.
Enerplus has been dumping some fixed assets lately. In November 2013, it sold off its Montney shale gas land of 33,000 acres for $118.8 million as it was not paying off for the company. Enerplus spent $47.16 million on its setup but the extraction cost was too much leaving the company with little profit margin. Instead, the company has closed a deal worth $144.30 million to extend its territory by 60,000 in the Marcellus shale play which is currently only 17,000 acres. This way, the company would not have to spend more money on exploration as a part of the land is already tested and in its use. Also, it would decrease the transportation cost and bring ease to the logistics of the company.
In my opinion, Enerplus has been taking the right measures which will enable the company to grow in the coming year. Instead of wasting money on the assets that might or might not work, the company is concentrating its resources on the assets which are already useful. The results of this strategy, however, may start reflecting in the financial statements and the stock price after a few quarters. Moreover, the company has managed to decrease its operating costs and interest costs substantially, which would benefit the company with better profit margins in the coming year. Overall, the cash flows of the company are in very good condition, and I believe the company will be able to maintain its current dividend levels in the foreseeable future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.