Back in November I wrote that Enerplus (ERF) was "Out Of The Woods & Yielding 6%". The investment thesis then (and still valid now) was the company's improving productivity profile in its Bakken operations vis-a-vis optimized completion techniques combined with a downspaced drilling program. What has caught me by surprise is the recent strength in the company's Marcellus operations combined with a sharp rally in natural gas prices. Combined, they have pushed Enerplus up 4% year-to-date while the market has tanked. In the previous article, I expected the stock to rise to $20 in 2014, for a total return of ~15%. Recent events in the natural gas market, combined with ERF's recent 2013 production & reserves report (see below) have encouraged my bullish outlook for the stock. I now expect the blue flame of natural gas to heat ERF up to $22 in 2014. If one adds in the 5% dividend, it's a total return approaching 20%.
The future beyond 2014 is looking more solid as well. Consider the highlights of the company's recent press release on 2013 production guidance:
- 2013 production grew over 9% to average 89,800 boe/day, beating the company's guidance by 800 boe/day.
- December production averaged 99,600 boe/day. This exceeded company expectations due to continued outperformance in the Marcellus, which averaged 170 MMcf per day during the month.
- Q4 2013 production averaged 94,200 boe/day. As a result of the Marcellus performance, natural gas increased to 56% of production for the quarter.
Note that while the company has been shifting towards liquids production ever since the bottom fell out of natural gas prices (as well as the company's dividend back in 2012...), the production increase in Q4 due to outperformance of Marcellus gas production came just as natural gas prices began moving higher in earnest and have recently since spiked up to over $5/MMBtu:
If this isn't enough good news, the company also reported outstanding 2013 year-end reserves:
- Replaced 238% of 2013 production.
- Added 78 MMboe of 2P reserves, 30% of which were crude.
- Including acquisitions and revisions, the company added 93 MMboe of 2P reserves (RRR=284%).
- 2P finding and development ("F&D") costs declined by over 50% to $11.28 per BOE.
- Total 2P reserves increased by 60.2 million boe to 406.0 million boe at year-end 2013. That's up 17% from 345.8 million at year-end 2012.
These are excellent results and show that the company is performing really well in both the Bakken and the Marcellus. One reason the stock has performed so well this year while the rest of the market has melted down was the impact these reserve numbers have had on discounted net present value ("NPV").
Before taxes, NPV10 is roughly $5 billion. Currently, ERF has a market cap of $3.84 billion and total debt (net of cash) of under $1 billion at the end of Q3. While these numbers alone may not make a compelling case today based on NPV10, investors should be looking ahead to 2014's reserves report as well as total PPP's (i.e. running room). Considering the excellent property in the Marcellus is likely to continue outperforming, and that the completion optimization and downspacing programs in the Bakken are relatively recent developments, it is quite likely the company could issue another very bullish reserves report this time next year.
Natural Gas Prices: A Real Shot In The Arm
In the Q3 earnings report, ERF reported natural gas sales of 275,164 Mcf/day at a realized price of $2.96/Mcf. Granted, not all of ERF's nat gas production is in the Marcellus and/or Bakken, but a $1/Mcf increase is an additional $24.7 million in revenue, most of which will flow directly to the bottom line. And that is assuming a realized price of only $3.96/Mcf. Considering net income in Q3 was only $34 million and total funds flow was $196.2 million, the increased production and increased price of natural gas is going to have a huge positive impact on the company. I would not be surprised if ERF reports Q1 2014 total funds flow and net income of $210 million and $40 million, respectively. That would be up 7% and 18%, respectively, over Q3 2013's results. I would expect the latest quarter (Q4) to fall somewhere in between. The point is - the outlook looks really solid. Looking farther out (2016), the company will be in an excellent position as lower-48 LNG export demand ramps up. This will be another catalyst for natural gas producers.
In its January investor update, Enerplus is looking for 10% production growth to 98,000 boe/day. The company expects to boost funds flow by 5% ($765 to ~800 million). The outlook for organic production growth in the Marcellus in 2014 is outstanding:
Summary & Conclusion
Dividend investors seeking monthly income should consider Enerplus Corporation. The company currently yields 5%. Bullish natural gas production and stronger realized prices, combined with excellent productivity improvements and a downspacing program in the Bakken (see my previous article), are two very positive catalysts for the company going forward. Longer term, the company's 2013 reserves report was simply outstanding. I look for ERF to reward shareholders with a 20% total return in 2014. And I say that looking straight into the face of a weak overall stock market outlook. ERF is a BUY.
Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article was obtained from company documents and/or sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make. Thanks for reading and good luck!