Enerplus: A Good Dividend Pick?

Mar.25.14 | About: Enerplus Corporation (ERF)

Summary

Increased production volumes have resulted in increased funds flow.

Growing cash flows and better management of the capital budget has resulted in better free cash flows.

Growth in the operating cash flows will support future cash dividends.

Enerplus (NYSE:ERF) is one of the few companies that pay monthly dividends. As a result, the stock is a popular choice for investors looking for regular stream of income. However, the company has been through a rough patch in the past two years, and the stock is currently making a recovery. Enerplus has gained more than 33% during the last twelve months. The prospects of the company look good due to the efficient allocation of resources. In this article, we will look at the dividends, growth in dividends and the future prospects of the company.

Dividend Growth

Enerplus had to cut its dividend in half during 2012 due to the losses and a decline in cash flows. The losses were mainly due to the weakness in natural gas prices and a lack of capital investment in the Canadian gas assets. However, over the last year, Enerplus paid a dividend of $1.0476 with a dividend yield of 5.3%, and the company has kept the dividend stable at $CDN0.09 per share/month - the payout to the U.S. shareholders varies with the exchange rate and the most recent was $0.08 per share. The total cash payment in dividends was $152 million during the last year.

Moving on to the payout ratio - the payout ratio based on earnings has improved for Enerplus over the last year. This was made possible by the increased funds flow growth, which went up 17% year-over-year to $671 million, mainly due to an increase in the production volumes, lower costs and increase in the commodity prices. The company has also decreased its capital spending over the last year with an expenditure of $830 million compared to $934 million, showing a decrease of 11.14% from the previous year. With an increase in funds flows, a reduction in capital spending and improved operational efficiencies; Enerplus was able to improve its free cash flows by 68% in the last year. Enerplus has a decent dividend performance amongst its industry peers such as Baytex Energy (NYSE:BTE) and Penn West Petroleum (NYSE:PWE) which is shown in the table below.

Dividends paid during the last year

Average Growth in Five years

Cash Dividends (millions)

Operating Cash Flows (millions)

Enerplus

$1.0476

-12.4%

$152

$682

Baytex

$2.35

11.8%

$205

$551

Penn West

$0.73

-19.6%

$320

$925

Click to enlarge

Source: Morningstar and SEC Filings.

The negative growth in dividends for the company is mainly due to the dividend cut in 2012. However, despite the huge dividend cut, the average of the company is better than Penn West. However, the company lags behind substantially compared to its other peer in the table above. The trend in the operating cash flows is encouraging for the company and Enerplus has not conducted another dividend cut since 2012. Furthermore, the management of the capital spending, improving commodity prices and the production levels should allow the company to maintain its dividends. Based upon the capital spending and the growth in the production volumes, the company calculated daily capital efficiency of approximately $26,000 per daily BOE.

Future Growth Prospects

The strength of exploration companies is determined by the assets they possess. Similarly, Enerplus has shown great strength with asset replacements and acquisitions over the last year. The company has replaced 238% of its assets during the year and added approximately 30% of crude oil reserves. Enerplus has also increased its Proved plus Probable reserves by over 17% over the last year and the company is expected to increase them with a compound annual growth rate of 10% per year in the future. Furthermore, the growth in the reserves and the increased production will again result in about 7% growth in the funds flows of the company over the next year. The higher production volumes and oil weighting has helped drive funds flow growth over the past three years.

The oil and gas companies are trying to increase the liquids in the production mix in order to counter the volatility in the commodity prices. Crude oil prices are expected to remain close to the current levels over the next few months; however, the increased economic activity due to the recovering global economy should push the prices up over the next 2-3 years. Therefore, Enerplus has increased its capital spending guidance to $712 million for the coming year and the company is building its liquids portfolio.

Conclusion

Enerplus is one of the highest yielding stocks in the sector and the company attracts a large number of income investors. As I have mentioned above, the change in the products mix, increased production volumes, and stabilizing commodity prices have resulted in increased funds flow and improved cash flows. As a result, the company is in a better financial position than it was two years ago. The company should be able to continue its current dividends.

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 an 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.