By Ishtiaq Ahmed
Enerplus Corp. (ERF) is one of the largest integrated energy companies headquartered in Canada. Enerplus owns a diversified asset base of oil and gas properties across several resource plays in both the U.S. and Canada. The company is growing its land position in the Deep Basin, British Columbia and Alberta. Enerplus also has conventional oil and gas assets spread across the Western Canadian Sedimentary Basin. The company was founded in 1986 and is headquartered in Calgary, Canada.
Enerplus stock has underperformed the market this year. The stock lost almost 30% since January. However, I think Enerplus is a deeply undervalued stock. My cash flow analysis also suggests that Enerplus' dividends are totally safe. Dividends are more than fully covered by the cash flows.
Enerplus pays a monthly cash dividend to its shareholders. Recently, the company cut its monthly dividends by 50% due to weak commodity prices. At the moment, the company pays a monthly dividend of 9 Canadian cents per share. In addition, the company offers the opportunity to receive stocks instead of cash dividends through its stock dividend program [SDP]. Even after the recent dividend cut, Enerplus offers an impressive dividend yield of 6.7%. In order to assess the dividend safety of the company, I went through the earnings and cash flows.
Earnings have demonstrated a mixed trend over the past three years. Revenues increased by 4.56% in 2010, but fell by 1.1% in 2011. The reason for the decline in revenues was falling commodity prices. Net income also followed the trend in revenues. The company reported a net income of C$109 million at the end of 2011. For the most recent quarter, Enerplus reported a net income of C$40.1 million ($37.9 million), or 31 Canadian cents per diluted share.
Revenues from oil and gas sales fell to C$387.9 million from C$409.1 million reported in the previous quarter. Operating expenses rose to C$219.7 million from C$211.2 million. For the last three quarters, Enerplus reported a total net income of C$148 million. Revenues from oil and gas sales fell to C$773.8 million. At the moment, the company has no hedges in place to protect it against declining commodity prices.
The cash flows from operations have been falling over the past three years. The company reported C$776 million in operating cash flows in 2009, which fell to C$623 million by the end of 2011.
The company has been investing in the business heavily. Enerplus invested C$578 million in capital expenditures in 2009, and it reported free cash flows of C$198. However, in the following two years, the company increased capital expenditures significantly and invested about C$2.7 billion. As a result, the free cash flows for Enerplus have been negative in the previous two years.
The firm has been funding the capital expenditures through borrowed funds. For the most recent quarter, Enerplus generated cash flows from operations of C$157 million, which is about C$6 million less than the same quarter last year. For the first six months, the company generated C$372 million in cash flows from operations and spent C$531 million in capital expenditures.
At the end of 2011, Enerplus' long-term debt stood at C$900 million. However, the company recently issued a new debt that will increase the total long-term debt above C$1 billion. At the end of the second quarter, the balance sheet showed a long-term debt of C$1.11 billion. Luckily, most of the debt has long maturities. Only one senior note worth C$175 million is due in 2014. Two other notes with a combined value of C$94 are due in 2015. All the remaining debt matures between 2019 and 2024.
Comparison with Peers:
Debt to Equity
Based on the forward P/E, Enerplus is trading at a discount compared to its peers. The stock is also attractive based on P/B and P/S ratios. Note that all above mentioned companies recorded negative EPS growth rates this year. They also faced declining margins due to depressed commodity prices.
Weakening gas and oil prices ate into the company profits and forced the company to cut its dividends. However, the recovering commodity prices should have a positive impact on the operations of the company. As I mentioned, the company invests heavily in the business. Enerplus further aims to spend approximately C$800 million ($777 million) on drilling this year, with 40% going to the productive Bakken shale-oil field. The company looks to double production there this year. I believe the recent dividend cut will not be repeated, and the firm will be able to generate enough cash flows to cover its dividend expenditures. If energy prices keep their momentum, there is even room for dividend growth in the future.