(Published by Bob Ciura on June 6)
As an oil and gas producer, Enerplus Corp. (ERF, Financial) suffered from the downturn in commodity prices from 2014 to 2016.
On the plus side, it is up 33% in the past year due to a recovery in oil and gas prices.
Enerplus benefits from a strong asset base, which fuels its steady monthly dividends.
The stock has a 1.1% dividend yield, which is roughly half the average dividend yield of the S&P 500 Index.
One advantage for Enerplus is it pays its dividend each month rather than on a quarterly or semi-annual basis. Monthly dividends give investors the ability to compound dividends even faster.
Enerplus is one of just 21 stocks that pay monthly dividends.
You can see the entire list here.
We will discuss Enerplus’ business model and whether it is an attractive option for income investors.
Business overview
Established in 1986, Enerplus is a producer of crude oil and natural gas assets in Canada and the U.S. It is a small-cap stock with a market capitalization of $1.9 billion.
Enerplus has high-quality assets, with operations in some of the premier oil and gas fields in North America, such as the Bakken/Three Forks resource play in North Dakota.
Another major area of production is the Williston Basin, where Enerplus produced 32,888 barrels of oil equivalents per day.
Source: May 2017 Investor Presentation, page 10
Its natural gas assets are primarily located in the high-quality Marcellus shale, one of the most economically sound natural gas fields in North America.
The company has a fairly balanced production mix. Approximately 52% of estimated 2017 production will be from natural gas, with 48% from oil and gas liquids.
Roughly three-quarters of Enerplus’ production is from the U.S., with the remaining 25% from Canada.
Total production fell 12% in 2016 to 93,000 barrels per day. The decline was entirely due to divestments. Last year, Enerplus divested assets with crude oil and natural gas production of approximately 13,500 barrels per day.
The company struggled with weak oil and gas prices in 2014 and 2015. As an oil and gas producer, it is highly reliant on a high commodity price for profitability.
That said, the company returned to profitability last year. In 2016, Enerplus generated a net profit of $294.7 million, which reversed a net loss of $1.12 billion from 2015.
Enerplus also had strong results in the first quarter of 2017. Net profit was $56.6 million, compared with a loss of $128.7 million in the same quarter last year.
Moving forward, the company hopes a combination of higher commodity prices, cost reductions and production growth will help sustain the positive momentum.
Growth prospects
Enerplus’ first growth catalyst is higher commodity prices. While oil and gas prices are up significantly from their 2016 lows, they are still a long way from their 2014 peak levels.
The company obviously cannot control oil prices. Instead, Enerplus is focusing on managing what it can control.
To that end, one initiative the company has undertaken is reducing its costs per barrel. Enerplus’ margins have expanded considerably over the past year.
Source: May 2017 Investor Presentation, page 6
The cash margin increased by $10 per barrel last quarter, year over year.
Lastly, Enerplus is investing to ramp up production.
For 2017, the company expects average production of 81,000 to 85,000 barrels of oil equivalents per day. Crude oil and natural gas production is expected to reach 38,500 to 41,500 barrels per day.
Capital expenditures are expected to be roughly $334 million in 2017.
By 2019, the company expects to increase production by 30% from 2016 levels. Production growth will be especially aggressive for liquids.
Liquids production is expected to grow at a 20% compound annual rate from 2016 to 2019.
Source: May 2017 Investor Presentation, page 3
It has sufficient reserves to support this production growth. The company replaced 142% of 2016 production last year with proven and profitable reserves.
Growth will likely come from the Williston Basin, which represents the company’s major U.S. oil operations.
Approximately 74% of 2017 capital spending will be allocated to the Williston Basin.
Dividend analysis
Enerplus recently declared a June dividend of approximately 0.0073 cents. This comes out to an annualized dividend payout of eight cents per share, good for a yield of 1.1%.
An important consideration for investors is dividend sustainability. One of the benefits of a low dividend yield is that it is easier to sustain when business conditions deteriorate.
For example, last quarter the company earned a net profit of $56.6 million and paid dividends of $5.37 million. This is a very low payout ratio of approximately 10%.
Plus, the company has a solid balance sheet.
Source: May 2017 Investor Presentation, page 7
With a low dividend payout combined with cost cuts, Enerplus has used excess capital to pay off debt.
From the end of 2015, the company reduced its net debt by 70%. The company has sufficient liquidity, with approximately $292 million in cash on the balance sheet, and no major debt maturities until 2020.
Enerplus is based in Canada, which means there are also unique tax considerations for U.S. investors.
The first is the company’s dividends will be issued in Canadian dollars, which exposes U.S. investors to currency risk.
In addition, investors should consider that buying stock in companies based in Canada may result in withholding taxes. Dividends received in Canadian dollars are subject to a 25% withholding tax.
The good news is, the withholding tax is waived for U.S. investors who hold the stock in a qualified retirement account, such as a 401(k) or IRA.
Final thoughts
Enerplus has a low dividend yield, but the upside is there is potential for significant dividend growth going forward.
The company is benefiting from rising commodity prices and its cost-cutting program. In addition, it has drastically improved its balance sheet over the past year.
Enerplus may not be attractive for investors looking for high dividend yields, but it could be viewed more attractively as a growth stock if oil and gas prices continue to rise.
Disclosure: I am not long any of the stocks mentioned in this article.
