Enerplus: A Deeper Look At Earnings And Dividends

| About: Enerplus Corporation (ERF)

By Ahmed Ishtiaq

Enerplus Corporation (NYSE:ERF) reported its third quarter results on November 9. The company reported losses mainly due to impairment charges. In addition, Enerplus provided the outlook for the next year and cut its growth estimates. Moreover, the company has announced the sale of assets in Manitoba for $220 million. Let's take a deeper look at the earnings and future growth of Enerplus, and how asset sales will affect the company.

Third Quarter Results:

The company reported a loss of $63.6 million, or $0.32 per share. The main reason for the loss was the impairment charge of $114 million, which came from Exploration and Evaluation (E&E) assets. The majority of impairment losses came from leases in West Virginia and Maryland. Leases in these two areas will expire in the next 12 months, and the company does not plan to allocate any capital there. In addition, Enerplus generated funds flow of $135 million, or $0.68 per share during the third quarter of the year. The funds flow for the previous year also stood at $0.68 per share. However, Enerplus reported a profit of $111 million, or $0.62 per share for the same quarter last year. Funds flow for the quarter was impacted by higher operating costs, one-time charges and foreign exchange fluctuations.

Capital expenditures for the quarter stood at $167 million during the quarter, declining by 20% compared to the previous quarter. Enerplus sold its equity interest in Laricina Energy Ltd. for $141 million, and used the proceeds to pay off debt. The transaction will provide the company more financial flexibility, and debt to funds flow ratio will come down marginally to 1.9 from 2.0. Further, the company has extended its $1 billion credit facility for another year at the same pricing and terms. During the third quarter, Enerplus drew $307 million from its credit facility. In addition, almost 58% of crude oil and 17% of natural gas during 2013 is hedged at $100/bbl and $3.31/Mcf, respectively. For the remainder of 2012, 63% of crude oil volumes are hedged at $96.22/bbl.

Asset Sales and Affect on Balance Sheet:

Enerplus is selling its non-core assets and using the proceeds to decrease its debt. Recently, the company announced the sale of its assets in Manitoba for approximately $220 million. Manitoba assets are producing about 1,600 bbls/day of crude oil and have 8.4 million barrels of estimated proved plus probable reserves. Enerplus believes that the assets in Manitoba are non-core to its business, and the proceeds from the sale will be used to reduce debt.

As a result, the financial flexibility of the company will improve further. After completion of the transaction, debt to funds flow ratio will improve for the company. The ProForma debt to funds flow ratio after this transaction stands at 1.5. The sale of an equity stake in Laricina Energy and Manitoba assets will reduce the debt to funds flow ratio by 25%. Furthermore, the company will continue selling non-core assets in order to focus its asset base and improve operational efficiencies.

Future Outlook:

Slow global economic growth and depressed commodity prices will continue to hamper the growth of energy companies. At the moment, the emerging economies are growing at a slower rate than expected. During the past decade, emerging economies have been the main drivers of growth for energy companies. Enerplus expects slow growth during 2013 and will reduce capital expenditures by 20%. However, for the current year, the company has maintained the level of capital spending at $850 million. In addition, the Manitoba assets sale will also contribute towards slow growth during 2013. The company will focus its capital spending budget on its crude oil properties.

Cash Flows and Dividends:

Dividends are an important factor for Enerplus investors. The company recently cut its dividends in half in order to cope with expected slow growth. At the moment, the company pays $0.09 every month. Enerplus made it clear that, despite slow growth, the company expects to maintain its dividend. Enerplus anticipated slow growth and reduced the dividends. A decrease in capital spending will augment the free cash flows. As a result, the company will have more cash to cover its dividend payments. At the moment, the payout for Enerplus stands at 159%.

Comparison with Peers:

Enerplus peers include Penn West Petroleum Ltd (NYSE:PWE), ARC Resources Ltd. (NYSE:ARX) and Pengrowth Energy Corp (NYSE:PGH).





Forward P/E















EPS Growth





Operating Margin





Net Margin










Debt to Equity





Source: Morningstar.com

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. All the participants in the industry recorded negative EPS growth and faced declining margins due to depressed commodity prices.


Infrastructure challenges, slower drilling activity and weak natural gas prices affected the earnings of the company during 2012. Due to the poor results, the stock fell almost 13% in early trading hours. At the current price of $13.07, the stock is offering a yield of 8.26%. I believe commodity price will improve over the next year. Enerplus is trying to improve its operations by focusing more on crude oil and selling non-core assets. Due to the asset sales and a decrease in capital spending, free cash flows will increase for the company. As a result, the firm should be able to maintain its dividends. Streamlined operations will help the company achieve better operational efficiency and improve earnings.

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

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ishtiaq Ahmed, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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