Oil Stock Watch: Enerplus Slashes Dividend - Business Model Now Sustainable

Jun.18.12 | About: Enerplus Corporation (ERF)

Enerplus (NYSE:ERF) announced a 50% reduction to the stock's monthly dividend to $0.09 per share from $0.18 per share, effective for the July 2012 payment, reducing the company's current yield to 8.0% based on the prior day's close.

Despite spending levels that were unsustainable this oil stock, which trades on the North American stock markets, had discussed plans to balance spending through the monetization of undeveloped assets and its equity portfolio over the next 12 to 18 months and had just recently reaffirmed its commitment to its dividend. We suspect that a dividend cut was anticipated by the market and partially priced-in given the stock's recent decline.

With the revised dividend incorporated into our modeling of this oil stock, total distributions decrease by approximately $170 million per year, reducing estimated combined capital expenditures and distributions (net of DRIP) in 2012 and 2013 by ~7% and ~17% respectively.

Under this view, our forecast of net debt improves by 15% exiting 2012e and 30% exiting 2013e. This translates to a cash use to cash flow ratio (net of DRIP) of 2.0x. For 2012e, This stock is still near the top of its Intermediate peer group, which currently averages 1.6x, however, its 2013e ratio is in-line with the group average of 1.3x.

When determining if this stock is a buy it is important to note that Enerplus' 2012 guidance remains unchanged with average annual production of 83,000 boe/d from capital expenditures of $800 mm. We note that this oil stock's capital spending position is unique in the E&P Yield universe in that it is committed to spending on its non-operated dry natural gas Marcellus position alongside its partners with, as of Q1'12, ~$115 mm of non-operated and $18 mm of operated spending remaining from its 2012e budget. The company has reported a reduction in Marcellus activity, but noted that its original $190 mm budget (operated & non-operated) was formulated on weak natural gas prices.

Additional information, which is of value to investors investing in oil stocks trading on the North American stock markets, are drilling results and related production information for the various oil and gas stocks. To view this data see Oil Stocks Western Canadian Drilling Results.

This oil stock, which trades on the North American stock markets, re-iterated its intention to monetize or joint venture a portion of its undeveloped land base in the Montney and Duvernay, its operated Marcellus acreage, as well as sell a portion of its equity portfolio (recall, Enerplus' largest position is 5 mm shares of Laricina Energy), targeting $250 to $500 mm of proceeds over the next 12 to 18 months.

While planned asset dispositions over the next 12 to 18 months are still important to the company's overall funding strategy, the company's dividend reduction is a step in a positive direction that improved spending sustainability with a lower payout ratio while still offering an attractive yield of 8% to investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.