Should Enerplus Corp. Be Your Top Energy Pick?

Enerplus Corp. (TSX:ERF)(NYSE:ERF) is poised to not only survive the latest slump in energy, but thrive. Why this stock could be a massive winner.

| More on:
The Motley Fool

Like with all of its peers, it hasn’t been a good time to be an Enerplus Corp. (TSX:ERF)(NYSE:ERF) shareholder. Over the past year, shares are down nearly 60%. Since the beginning of the year, the performance has been much better, but the stock has still declined 27%.

The energy sector is filled with cheap stocks. What makes Enerplus a better choice than some of its peers? Let’s have a closer look.

Good results

Enerplus has operations concentrated in three main areas–the Williston Basin in North Dakota, the Marcellus in Pennsylvania, and in the Waterfloods area in southern Alberta and Saskatchewan. Production is approximately 55% crude oil and natural gas liquids, and 45% natural gas.

Like many of its peers, Enerplus has cut capital expenditures because of today’s tough environment. Capex has declined some 35% compared with this point in 2014. But unlike its peers, Enerplus has actually been able to increase production slightly, guiding towards between 100,000 and 104,000 barrels of oil equivalent in 2015.

This has led to results that are weak, but not a disaster. The company generated $266 million in funds flow over the first six months of the year, and thanks to an aggressive hedging program, it looks like it’ll be able to at least maintain that over the last half of the year, unless crude really falls off a cliff. About 35% of 2016’s production has been hedged at the $65 per barrel level.

These are prudent moves by a good management team. This gives the company some breathing room in case crude doesn’t recover until well into 2016.

Great assets

One of the things I like about Enerplus is the terrific assets it has, especially in North Dakota. This low-cost oil is profitable even in today’s low-priced environment.

The finding and development costs for the North Dakota assets are the lowest in the region, coming in at just over $10 per barrel. Add operational costs, and the company’s netbacks in the second quarter were still $27 per barrel before gains from hedging, and $40 per barrel after. This, combined with further cost cuts and improvement in commodity prices, means the company could actually post up to $100 million in free cash flow in 2015.

Then there’s the company’s gas assets in the Marcellus, which are proving to be long-lasting reserves. Even after producing 188 MMCF of natural gas per day in 2014, further exploration actually increased reserves in the region by nearly 40%. When natural gas recovers, investors will really see Marcellus add to the company’s bottom line.

Balance sheet strength 

Of course, none of these assets are much good if Enerplus is about to be crushed under the weight of its debt.

Right now, I’d say Enerplus’s balance sheet is in pretty good shape. The company owes a little more than $1.1 billion in long-term debt, but there are no major repayments due until 2017. Most of the debt isn’t due until well into the 2020s. It also has a $1 billion revolving credit facility that still has about $900 million in available funds to draw against.

The company also pays an attractive dividend of a nickel per share, per month, putting the yield at 7.4%. The total cost of the dividend works out to about $123 million per year, which is sustainable if the price of crude recovers to around $60 per barrel. Enerplus is one of the few mid-sized producers still left paying a dividend.

Enerplus is a solid way to bet on the eventual recovery of both oil and natural gas. The company’s hedging program and balance sheet will help it get through today’s tough market, while investors collect the generous dividend for being patient. And if crude can continue to recover, Enerplus shares should end up much higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »