CA - Enerplus Corporation: Good Company On Sale (Rating Upgrade)

2024-01-18 08:00:00 ET

Summary

• Enerplus Corporation is a Canadian stock that focuses primarily on the Bakken and Marcellus basins.
• The analyst community is moderately bullish on the stock, with 8 out of 11 covering the stock rating it as a buy.
• Enerplus has a solid decade of Tier 1 drilling prospects ahead of it and has been doubling output over the last 4 years.
• We rate Enerplus Corporation stock as a buy at current levels.

Introduction

Enerplus Corporation (ERF) is a Canadian company that we have under-covered in recent years, with our most recent article being about 2.5 years ago. We've done well in the Canadian sector, but we wish we had paid a little more attention to this one.

The point has been made recently that the Canadian sector is ripe for consolidation, and I couldn't agree more. Enerplus is just such a company that might be attracting that sort of attention, but I haven't heard rumors in that regard, so I won't start any now. That said, there are just too many good companies to properly track - that's our excuse, and we're going to stick with it.

In 2023, the company sold its Canadian assets to focus on the prolific and sizeable Bakken position it holds. In the past year, the company has traded as high as $18 per share, but has fallen victim to the decline in WTI prices (CL1:COM), which have taken down the entire sector since September.

The analyst community is moderately bullish on the stock, with 8 of 11 of those covering the stock rating as a buy. The overall rating is Overweight , with price targets ranging from $16.45 to 25.00 per share. The median splits the difference at $21.00. EPS forecasts are for $0.60 per share in Q4, and a decline to $0.42 for Q1 2024. We will try not to read too much into that statistic, as it's more reflective of the state of the oil markets than a comment on the company.

On a technical basis, the company just made a double bottom at a long-term support line at $14.33, and is trading marginally down today. Does this spell opportunity? Let's review.

The thesis for ERF

As we have noted in past comments, the Bakken is one of two shale plays adding production month-over-month. The Bakken is also the most prolific with new oil production of 1,868 BOPD per rig. From the graphic below, we can see that ERF's acreage includes a solid, contiguous block in the core Dunn county area. Additionally, they hold a nice block in eastern Mountrail County - extreme upper right-hand corner - an area one my geologist industry contacts notes as being increasingly productive. This month's EIA-DPR confirms that the Bakken is outperforming other basins (along with the Permian of course), with a gain of -9- bbl per rig. It all adds up.

Additionally, ERF wells are solidly in the higher-performing part of the curve, with wells at the two current pads - Hay Draw and Bice - exceeding average type curves set previously. Eyeballin' the curves, Hay Draw wells have delivered another 20-25K bbls over previous wells, with similar performance for Bice. Looking at the slide below, Enervus data shows that ERF has 13 of the top 100 Bakken wells as operator, and working interests in 20 of the top 100.

ERF is a play on growth in a basin with rising production, and company with a solid decade of Tier 1 ($40 breakeven) drilling prospects ahead of it. They have proved to be good stewards of their Bakken footprint, doubling output over the last 4 years. ERF meets my five conditions for long-term survival: high quality rock, scale, logistics, technology, and low costs.

Q3 2023 and guidance

Third quarter total production was 103,192 BOE per day (up 8% from the prior quarter), including liquids production of 66,625 barrels per day (up 14% from the prior quarter). Adjusted funds flow was $263.7 million in the third quarter, which exceeded capital spending of $121.4 million, generating free cash flow of $142.3 million.

Total return of capital to shareholders during the third quarter was $67.7 million (inclusive of share repurchases and dividends), with $200.8 million returned through the first three quarters of 2023. It is on track to return approximately 70% of full-year 2023 free cash flow to shareholders, which is expected to result in fourth quarter return of capital of approximately $100 million, based on the current commodity price environment. Enerplus has repurchased $41 million of stock in the fourth quarter through November 1, with additional repurchases planned. 2023 capital spending guidance was narrowed to $520 to $540 million (from the previous range of $510 to $550 million).

In the third quarter of 2023, Enerplus' operating expenses were $10.17 per BOE, compared to $10.47 per BOE during the third quarter of 2022. The Company continues to expect operating expenses in the fourth quarter to increase compared to the third quarter due to planned workover activity. Full-year operating expenses are tracking the lower end of the previous guidance range. As a result, Enerplus has revised its full-year 2023 operating expense guidance to $10.75-$11.00 per BOE, from $10.75-$11.50 per BOE.

Net debt was $212.1 million at September 30, 2023 compared to $199.6 million at June 30, 2023. The increase in net debt was primarily due to the non-cash operating and investing working capital deficit decreasing by approximately $85 million. A portion of this is expected to reverse in the fourth quarter of 2023.

Full year and Q4 guidance

Capital spending guidance in 2023 has been narrowed to $520 to $540 million from the prior range of $510 to $550 million.

Annual production guidance has been revised to 98,000 to 99,000 BOE per day from the prior range of 94,500 to 98,500 BOE per day, representing an increase of 2,000 BOE per day at the midpoint. Annual liquids production guidance has been revised to 60,500 to 61,500 barrels per day from the prior range of 58,500 to 61,500 barrels per day, representing an increase of 1,000 barrels per day at the midpoint.

Enerplus is providing fourth quarter 2023 production guidance of 95,000 to 99,000 BOE per day, including liquids production of 60,500 to 64,500 barrels per day.

Company filings .

Catalysts for Enerplus Corporation

ERF is on some liquids rich acreage with its position and is wisely allocating capital toward the Bakken, as discussed in the slide below.

Third quarter oil prices in the $80's generated $141 mm in free cash after capex. The company has been reducing the share count with this surplus, and has indicated its intent to continue. Debt reduction has also been a priority, and now debt is negligible .

Your takeaway

I am going to be conservative and take their Q2 EBITDA of $190 mm as being more reflective of current conditions than their Q3 EBITDA of $255 mm. On a run rate basis, that has ERF trading at 4X EV/EBITDA, which is not excessive for a company with the growth profile they have maintained. Their flowing barrel price is also in an attractive range at $31k per barrel.

I think Enerplus Corporation is in a buy zone for risk-tolerant investors, and I think the downside risk is minimized on a technical basis. Fundamentals can certainly override technicals and could impact prices. The whole upstream sector is a hot mess presently, and is something else that should be taken into account when making an investing call. Will it always be this way? Of course not, and that's the reason we buy when good companies are on sale.

We are going to put a buy tag on Enerplus Corporation, and I wouldn't be afraid of taking a position a current levels.

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