Enerplus Corporation (ERF, Financial) is one of the most affected stocks in the oil industry on account of the declining crude prices. In fact, even apart from the present oil decline, it didn’t have a steady performance. If we look at its historical chart, the stock never returned to its former glory after the fall of 2008. The chart below gives us an insight into its ups and downs. The stock touched its all time low in January 2015, which does not come as a surprise considering its previous trend. And now with the oil industry having gloomy days ahead, Enerplus will have to take tough initiatives to stand its ground.
A mixed bag
Interestingly, in spite of the falling commodity prices, the company has a strong balance sheet. Its net income for the fourth quarter rose a whopping 411% to $151.65 million from a year ago. Also a strong production growth led to a 14% increase in its funds flow and the company hopes to maintain the same momentum. Its higher expectations stems from the fact that it has hedged a large percentage of both its oil and gas production at prices well above current market.
Although the company has hedged most of its production, it is not completely immune to the commodity price weakness. Therefore, Enerplus has further reduced its capital spending by 40% from last year, which amounts to $480 million. In fact it is even $150 million lower than its present guidance. These reductions will be led by cutback in its production, majority of which will come from the Marcellus and the Bakken projects.
In addition, the company is also focused on its operational performance and therefore has decided to sell two of its noncore assets having an oil production capacity of 1900 BOE a day. The deal would fetch $182 million before closing adjustments and transaction costs and is expected to be closed in the second quarter. With the divestment of its noncore assets the oil producer will be able to focus on its high margin low cost properties, which would yield promising returns in the days to come.
Strategic moves
On the financial front, Enerplus took a tough but wise decision to curtail its monthly dividends to a more appropriate level. It has reduced its dividends to $0.05 per share from the current level of $0.09 per share. This is a bold step and even though it may hurt investors in the near term but considering the present commodity price environment it seems to be the right thing to do and these short term pains will benefit the company in the future.
All the efforts look good, but without an oil turnaround the stocks would continue to remain under pressure. The oil industry has been sailing through troubled waters since the mid of last year and even now it is struggling to find a shore. It seems that oil has become one of the most unpredictable commodity in the market with analysts unable to come to a single conclusion.
As of now more and more disappointing cues are coming in, with the International Energy Agency (IEA) predicting that the current stability in the oil market will not last long as the global oil glut is worsening. IEA also states that the huge U.S oil production will add to this pressure as it shows no signs of slowing down, and the country may soon run out of spare capacity to store crude. This is quite alarming and will put further downward pressure on prices.
Conclusion
If so is the case then investors need to be on their watch, as it will drag the stocks further down no matter how good the balance sheet looks. Moreover, Enerplus’ valuations betray it, as the company does not have any signs of a forward P/E and the P/S ratio of 2.12 is higher than the industry average of 1.71. Therefore, in the light of these facts it seems prudent for investors to avoid this stock and look value stocks in other sectors.
