Founded in 1986, Enerplus Corp. (TSX: ERF)(NYSE: ERF) has been through it all: cyclical highs and lows, worries about peak oil, etc. At least it seemed that way until the last few years brought a series of government and regulatory decisions that have really pummelled the Canadian oil and gas sector down to levels so low that at times it feels like it cannot recover.
Here we are today, and while Enerplus continues to survive, its stock continues to falter. Trading 64% lower than 10 years ago, should investors cut their losses and run from this money pit or should we back up the truck and buy this beaten-down quality stock?
Exposure to some of the most prolific resource plays – mostly in the U.S.
Enerplus has significant exposure to some of the most prolific unconventional resource plays in the U.S., including the Bakken resource in North Dakota and Montana, and Marcellus shale oil in Pennsylvania, meaning that it is sheltered from Canadian woes.
Enerplus’ third-quarter results have once again shown the value of its quality assets. A steady increase in production (+6%) was accompanied by a 7% reduction in costs and a ramp up in returning cash to shareholders.
In 2017, operating cash flow increased 72%, and in 2018, operating cash flow increased 55% to $739 million, with free cash flow generation of $160 million. With this strong cash flow generation, Enerplus’ capital plans are fully funded, taking much risk off the table.
Management has signalled to investors that at oil prices above $50, they will prioritize shareholder distributions over growth. This means dividend increases are likely in Enerplus’ future and that the stock’s current dividend yield of 1.41% is due to get higher.
Acceleration of share buybacks to return cash to shareholders
Since energy stocks are not benefitting much when oil and gas companies reinvest their cash flows into the business, Enerplus has been doing what many oil and gas companies are doing: returning cash to shareholders in the form of dividends and share buybacks. In 2019, the company plans to repurchase 10% of its shares outstanding.
While share buybacks are not the preferred method for creating shareholder value, Enerplus’ strong cash flow and capital position will enable the company to do this as well as continue to invest in their U.S. assets.
The future of the Canadian oil and gas industry
When we think about the future of the Canadian oil and gas industry, we quickly realize how many competing interests have muddied the waters. At the end of the day though, I think the fact is that oil and gas resources will be needed for decades to come as the world transitions to cleaner energy.
I think that Canada will need to get its act together and build the pipelines that are necessary to bring its comparatively cleaner oil and gas to customers both at home and around the world. This will contribute to cleaning up the world.
Foolish bottom line
Enerplus is yet another energy stock that is flailing in an environment that has offered little hope in recent years. It seems to me that the call on an energy stock such as Enerplus is basically a call on the sector as a whole and given the fact that Enerplus is largely exposed to the U.S., on sentiment.
So it has come down to that. I mean, this was always true but it is true today more than ever. Without the proper regulatory framework and friendly government policies, even the best energy companies cannot thrive, and this will keep sentiment down.
Enerplus has done a good job at focusing its operations south of the border, and with a low debt balance sheet and strong capital management, this company can stick it out and wait for the tide to turn. Investors that want to position themselves into the energy sector would do well adding Enerplus.
