ERF - Enerplus: Excellent Q3 2023 Results (Rating Upgrade)

2023-11-03 05:16:03 ET

Summary

• Enerplus reported Q3 2023 liquids production around 4% higher than previously expected.
• This led to another positive revision to production guidance, while costs are also trending lower than previously expected.
• Enerplus is now projected to generate over $300 million in free cash flow in 2H 2023, including around $162 million in Q4 2023.
• Much of that will likely go towards share repurchases.
• Enerplus repurchased 49 million shares between August 2021 and August 2023, and may repurchase another 21 million by August 2024.

Enerplus Corporation (ERF) reported strong Q3 2023 results , with liquids production around 4% higher than it previously expected. This resulted in another positive revision to its production guidance, along with improved cost guidance as well.

Enerplus reported $142 million in free cash flow in Q3 2023 and I project that it can generate another $162 million in free cash flow in Q4 2023 at current strip. Much of this is expected to go towards share repurchase.

Enerplus repurchased 49 million shares from August 2021 to August 2023 and now has the authorization to repurchase another 21 million shares by August 2024. This would reduce its share count to around 191 million by August 2024.

I now estimate Enerplus' value at approximately $20 per share, an increase of $3 per share from my previous estimates due to its continued production outperformance and its diminishing share count.

Normal Course Issuer Bid

Enerplus renewed its normal course issuer bid in mid-August. This allows it to repurchase up to 20.97 million shares over the next 12 months (until August 16, 2024).

During its previous two normal course issuer bids, Enerplus repurchased the full amount of shares that it was allowed to repurchase. For the August 2022 normal course issuer bid, Enerplus repurchased 23.14 million shares at a weighted-average price of US$15.84 per share. For the August 2021 normal course issuer bid, Enerplus repurchased 25.57 million shares at a weighted-average price of US$11.14 per share.

These repurchases have reduced Enerplus's outstanding share count to approximately 211 million, compared to approximately 257 million shares when it started the August 2021 normal course issuer bid.

If Enerplus repurchases the full amount of shares again, it would end up with approximately 191 million shares by August 2024, allowing for a bit of share-based compensation.

Excellent Q3 2023 Results

Enerplus reported excellent Q3 2023 results that exceeded expectations. It previously indicated that Q3 2023 liquids production would be around 64,000 barrels per day, including approximately 52,500 barrels per day in oil production.

Enerplus ended up reporting 66,625 barrels per day in Q3 2023 liquids production along with 54,195 barrels per day in Q3 2023 oil production.

Enerplus also controlled operating expenses well, reporting operating expenses of $10.17 per BOE in Q3 2023. This was down marginally from Q2 2023 despite an increased liquids weighting in its production.

The strong production (with no change to the midpoint of its capex budget) allowed Enerplus to generate $142.3 million in free cash flow in Q3 2023.

Guidance Updates

Enerplus made another positive revision to its 2023 guidance. It now expects to average around 98,500 BOEPD in 2023 production at guidance midpoint, a 2% increase from its previous guidance (from Q2 2023) and a 3% increase from its original guidance.

Enerplus also expects to average 61,000 barrels per day in liquids production during 2023, which is also a 2% increase from its Q2 2023 guidance and a 3% increase from its original guidance .

The production increases have come with essentially no change to its capital expenditure budget. Enerplus tightened up the range for its 2023 capex to $520 million to $540 million, but the midpoint is unchanged from its Q2 guidance and only $5 million higher than its original guidance.

Enerplus also made positive revisions to its expense guidance, with projections for operating expenses and transportation expenses being reduced by a combined $0.40 per BOE.

The only negatives are around differentials, with Enerplus noting that Bakken oil prices weakened in Q4 2023 due to increased basin production and the effect of planned refinery maintenance outages. It now expects to realize $0.25 less than WTI for the whole year, compared to its Q2 2023 guidance for zero differential and its original guidance to realize $0.75 more than WTI.

Enerplus also expects its Marcellus differential to be $0.10 per Mcf wider than previously expected.

Q4 2023 Outlook

Enerplus provided Q4 2023 production guidance for approximately 97,000 BOEPD in total production, including 62,500 barrels per day in liquids production. This is around a mid-single digits decline from Enerplus's Q3 2023 production, but still appears to be higher than previous expectations. Enerplus increased its full-year 2023 production guidance by more than what its Q3 2023 outperformance would contribute by itself.

At the current strip of $83 to $84 WTI oil, Enerplus is now expected to generate $457 million in revenues after hedges in Q4 2023.

Enerplus noted that its operating expenses are expected to increase in Q4 2023 due to workovers, so I am modeling it at $12 per BOE per the quarter, which should be consistent with its full-year guidance.

Enerplus is now projected to generate $162 million in free cash flow in Q4 2023, bringing its 2H 2023 free cash flow to a bit over $300 million.

Enerplus' Q4 2023 free cash flow may end up higher than Q3 2023 free cash flow (despite less production) due to slightly stronger commodity prices and Q4 having relatively low capex.

Enerplus has kept its quarterly dividend at $0.06 per share, which is around $51 million per year in dividends at its current share count. This share count is likely to continue decreasing as mentioned above. Completing its current normal course issuer bid would cost Enerplus approximately $370 million at its current share price.

Notes On Valuation

I have increased my one-year target price for Enerplus to approximately $20 per share. This increase is based on its continued production outperformance while spending within its capex budget, along with positive performance with regards to cost guidance as well.

I have also assumed that Enerplus reduces its share count to around 191 million by August 2024. At current strip prices it appears capable of reducing its share count to that level while also growing liquids production by low-to-mid single digits and reducing its net debt.

Conclusion

Enerplus reported excellent Q3 2023 results, with liquids production around 4% higher than its previous expectations. This has led (along with improved Q4 2023 expectations) to another positive revision to its full-year production guidance. Enerplus also made positive revisions to its cost guidance while holding its capex budget steady. The only negatives were around differentials trending a bit wider.

This has resulted in a projection that Enerplus can generate around $162 million in free cash flow in Q4 2023 after reporting $142 million in free cash flow in Q3 2023. Enerplus will put much of that free cash flow towards share repurchases, having renewed its normal course issuer bid. It is now on track to end up with around 191 million outstanding shares by August 2024.

Due to its continued production outperformance and improved cost expectations, I have increased my estimate for Enerplus' value (based on late 2024 metrics) to $20 per share at my long-term commodity prices of $75 WTI oil and $3.75 NYMEX gas.

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