|Shares Out. (in M):||206||P/E||0||0|
|Market Cap (in $M):||1,174||P/FCF||0||0|
|Net Debt (in $M):||1,000||EBIT||0||0|
In an oil and gas market that appears to have no bottom (or fans), I am pitching a contrarian investment in a shale oil and gas exploration and production company, Enerplus Corporation.
To begin, I do not claim to have any near-term insight into the supply/demand relationship of today’s global energy market. Nor do I have clarity on technical trading aspects of the spot price of oil and natural gas. If I did have that type of insight, I’d either be a lot smarter than I am or I would be fooling myself considerably. Additionally, I am sure there are other E&P companies that have sound investment characteristics on par or superior to those of Enerplus.
Still, I know Enerplus better than other companies in this space and I have followed their activities for some time. I feel Enerplus’ management has proven to be intelligent operators and sound financial stewards.
In this tough commodity environment, I have gravitated to companies with sound balance sheets, good management teams, superior assets and efficient operating metrics. Enerplus possesses all of these qualities.
Enerplus has acreage in the Williston Basin in North Dakota, in the Waterfloods area northwest of the Williston Basin in Canada and natural gas assets in the Marcellus in the north/east section of Pennsylvania.
Over the past few years, Enerplus’ management team, led by Ian Dundas, has been shedding what they describe as non-core assets. To illustrate, in 2013 and 2014 they received proceeds of about $350 million and $200 million. They’ve continued to shed more non-core assets in 2015, but the pace of this will clearly slow as they continue to focus their asset base.
This strategy has allowed them to recycle capital back into their high-growth opportunities in the Williston Basin. Throughout this portfolio restructuring, they’ve held their position in the slow-decline, high-return Canadian oil Waterfloods assets that helps to feeds useful cash back into Enerplus.
Currently, Enerplus produces a bit over 100,000 barrels of oil equivalent (BOE) per day. Their production has been consistently increasing over the years and they most recently increased their production expectations for 2015.
About 40% of their production is in oil and natural gas liquids. The other 60% of production comes from their natural gas production. However, given the pricing of natural gas, about 90% of their revenue currently comes from oil and liquids.
They have hedged about 35% of their expected oil and liquids production for both the back half of 2015 (at a floor price of about $85 per barrel) and for all of 2016 (at a floor price of about $65 per barrel.) This provides some time to deal with lower oil prices today.
Enerplus’ current dividend yield is about 12%, even as it has recently been almost cut in half down to about 50 cents per share. To add to my comfort of the dividend’s sustainability, it only represents about 20% of their current funds flows.
Their outsize yield is a obviously a function of the their stock price plummeting from about $24 per share in June 2014 to today’s sub-$6 per share print. And, more recently, in April with oil’s temporary rebound from the $50 level to the $62 level, Enerplus’ stock price hit $13 per share.
The recent plunge in oil prices below the $50 level - now slightly above $40 - has brought Enerplus’ stock price much lower than the earlier lows of $8 to $9 per share we saw in the spring.
The sentiment is terrible and the consensus view is oil/natural gas price will continue to decline until a lot of companies go broke. Based on my view of Enerplus’ financial structure, I have cautious comfort that they’ll be standing when oil inevitably rebound.
In the meantime, the dividend should help buffer the pain a bit.
Like other E&Ps in this environment, Enerplus has cut their capital expenditures by about 35% for 2015. In addition, their focus is to cycle cash into their highest quality, highest return opportunities in North Dakota. Even with this cut in capex, their production continues to grow.
Today, Enerplus owes about $1 billion and has another $1 billion open credit line. Their finances exceed their covenants by a massive margin currently. They’ve only drawn about 8% against their credit line. The next maturity after a small maturity in October comes in mid 2017 and their debt’s maturity structure stretches out for many years after that.
To give you a sense of the lack of immediate pressure on their balance sheet, during the past quarter, with additional non-core asset sales, they actually paid down debt. Further, the dividend now only represents about $100 billion per year and their capex spending plans are set at about $550 million. This stands against their current funds flow of about $500 million in today’s environment. Funds flow was about $160 million in the second quarter.
I do feel Enerplus has the staying power to survive this tough period and thrive going on the other end of it.
Cost Reductions and Efficiencies:
According to management on the latest earnings call in early August, all-in drilling completion and tie-in costs have been reduced by about 25%. This has helped to mitigate this commodity price plunge. In addition, Enerplus has consistently found production efficiencies as both technology and overall industry learning has occurred over the years.
Enerplus expects to have the combination of their operating cost, transportation costs and SG&A expenses down to about $12 per barrel. It’s worth comparing this to their netbacks.
Their netback per BOE in the second quarter (with oil at about $55 per barrel) was $27 per barrel before hedges and about $40 with hedge gains included. For the first half of 2015, the netback figures were $22 and $37, respectively.
For the third quarter with oil quickly plunging down to $40 from $60 at the start of the period, I’d expect the unhedged netbacks to be no more than $10 lower. This would put it at about $17 per barrel. With their hedges in place for the third quarter, I’d expect much less of a decline, putting hedged netbacks at about $35.
The above figures are naturally rough guesses. It’s worth pointing out that an additional factor that might help against these lower oil prices is the variable nature of the approximate 20% royalty payments made against revenue.
I will also add, if we see oil prices down here for too long or even lower over the next few years, then the entire service complex will see pressure as well. This should help mitigate (not eliminate) the pressure in netbacks earned by E&Ps.
In summary, with a new 50% plunge - following the first 50% plunge - in their stock price at oil’s peak price one year ago, I think now is the time to be long high-quality E&Ps such as Enerplus.
As we wait for oil to do its thing - and again, I have no idea when it will rise again, but I do feel strongly that it will be above $40 within a couple years - Enerplus also offers a 12% yield today.
Rise in oil prices, eventually.