ERF:CC - Enerplus: Improved Performance And Decreasing Price Realizations

Summary

• Due to the increasing oil and gas production in the Bakken region and Marcellus, I expect Enerplus’ total production to increase.
• However, oil and natural gas prices have decreased significantly and the company’s price realizations will not be as high as before.
• Enerplus Corporation’s capital structure depicts a healthy position and enables the company to increase its distributions.
• In 3Q 2023, ERF generated $272 million of free cash flow, which indicates over 100% advance versus the amount of $130 million in 2Q 2022.
• The stock is a hold.

Enerplus’ ( ERF ) stock price has been almost stable during the past month. ERF increased its 2022 LNGs production guidance by 1000 barrels per day and set its capital spending guidance to $430 million. Based on the current oil and natural gas production outlook in the United States, especially in the Bakken region and Marcellus, combined with the company’s investments in the mentioned regions, I expect its production to increase in the following quarters. However, oil and natural gas prices decreased in the past months and are not expected to come back to their high levels soon. The stock is a hold.

Quarterly results

In its 3Q 2022 financial results, Enerplus reported a net income of $306 million, compared with a 2Q 2022 net income of $244 million. The company’s adjusted net income increased from $172 million in 2Q 2022 to $208 million in 3Q 2022. In the third quarter of 2023, Enerplus’ cash flow from operating activities and adjusted funds flow increased by 63% QoQ and 20% QoQ to $410 million and $356 million, respectively. Enerplus’ net debt to adjusted funds flow ratio improved from 0.5 in 2Q 2022 to 0.3 in 3Q 2022. As a result of better financial results in the third quarter, ERF increased its dividend per share from $0.043 per share in 2Q 2022 to $0.050 per share in 3Q 2022. Also, the company increased its quarterly dividend by 10% to $0.055 per share.

“Our operating momentum continued through the third quarter with liquids production increasing 20% quarter-over-quarter and strong volumes expected through the end of the year,” the CEO commented. “The result of this execution has been robust free cash flow generation which has allowed us to reduce our net debt by almost 40% and return over $270 million to shareholders through the first nine months of 2022. We remain well positioned to continue with these initiatives in the fourth quarter and into 2023,” he continued.

The market outlook

According to Figure 1, 94% of ERF’s revenue in the third quarter of 2022 belonged to its sales in the United States. ERF’s sales of crude oil and natural gas in the United States relate primarily to the company’s North Dakota and Marcellus properties. Figure 2 shows that U.S. Liquid fuels consumption decreased from 20.47 mb/d in 3Q 2022 to 20.26 mb/d in 4Q 2022 and is expected to decrease further to 19.4 mb/d in 1Q 2023. Also, U.S. natural gas consumption increased from 80.79 bcf/d in 3Q 2022 to 92.96 bcf/d in 4Q 2022. EIA expects U.S. natural gas consumption to increase further to 100.88 bcf/d in 1Q 2023. Due to the lower-than-normal temperatures this winter and the global recession, WTI oil prices decreased from $93.07 per barrel in 3Q 2022 to $82.69 per barrel in 4Q 2022. EIA expects WTI crude oil price to be $79.73 per barrel in 1Q 2023. Also, Henry Hub’s natural gas price dropped from $7.99 per million Btu in 3Q 2022 to $5.55 per million Btu in 4Q 2022 and is expected to be $3.13 per million Btu in 1Q 2023. However, it is worth noting that the sudden reopening of China which increases global crude oil demand, and the continuing geopolitical tensions in Europe support oil prices. Also, the restart of Freeport LNG which increases the demand for natural gas significantly in the United States supports natural gas prices.

Figure 1 – ERF’s sales by region and commodity

Figure 2 – U.S. energy market summary

ERF's total average daily production increased from 94142 BOE/d in 2Q 2022 to 107808 BOE/d in 3Q 2022, driven by higher natural gas liquids and natural gas production, partially offset by lower crude oil production. It is worth noting that crude oil and NGLs production accounted for 63% of the company’s total production in the third quarter of 2022, compared with 60% in the previous quarter. The company’s 4Q 2022 production guidance was 105,000 to 110,000 BOE per day, including liquids production of 64,000 to 68,000 barrels per day.

“North Dakota production averaged 73,188 BOE per day during the third quarter of 2022, an increase of 25% compared to the prior quarter and 16% compared to the same period a year ago,” the company explained. “Marcellus production averaged 165 MMcf per day during the third quarter of 2022, an increase of 7% compared to the same period in 2021 and 2% lower than the prior quarter,” the company continued.

According to GlobalData, Marcellus oil and natural gas production is expected to increase in the following years (Figure 3). Global Data projects natural gas production at Marcellus and Utica shales to rise at a CAGR of 5.1% by 2025. Moreover, according to Figure 4, Oil and natural gas production in the Bakken region increased in the past months and is expected to increase further in March. According to the company’s 3Q 2022 presentation, ERF's capital expenditures and operations have been increasing in the Bakken region (which affects its production in North Dakota) and Marcellus.

Figure 3 – Marcellus oil and natural gas production outlook

Figure 4 – Oil and natural gas production in the Bakken region

ERF performance outlook

After a deep drop in the company’s cash and equivalents to $23 million in 1Q 2022 versus its amount of $61 million at the end of 2021, ERF’s cash generation improved and increased back to $42 million in the third quarter of 2022. Also, the company’s debt amount was in a decreasing path during the preceding year and ultimately, sat at $456 million in 3Q 2022 year-over-over compared with its level of $902 million in 3Q 2021. A decrease in total debt combined with increasing cash generation led to a level of $414 million in net debt, which is lower year-over-year versus previous level of $859 million at the time in 2021.

In minutiae, ERF’s net debt plunged from $571 million at the end of the second quarter of 2022 to $414 million at the end of 3Q 2022. Furthermore, ERF’s total equity improved considerably to $921 million in 3Q 2022 compared with its previous amount of $731 million at the end of 2Q 2022. Thankfully, Enerplus Corporation’s net debt is well beneath its total equity, which can tailor a scope of capacity to bring benefits for its shareholders and assimilate upcoming risks. Thus, Enerplus Corporation’s capital structure depicts a healthy position and enables the company to increase its distributions (see Figure 5).

Figure 5 – ERF’ capital structure (in millions)

After the downturn of 2021 due to the COVID-19 pandemic, the company started the recovery process successfully. ERF’s cash operation boosted to $410 million in 3Q 2022 compared with its amount of $251 million at the end of 2Q2022. Compared with last year’s result of $182.2 million, the cash operation boosted astonishingly year-over-year in 3Q 2022. Also, Enerplus Corporation’s capital expenditure increased slightly by around 13% to $137.6 million in 3Q 2022 versus its previous amount of $121 million at the end of the second quarter of 2022. When all was said and done, the company ultimately generated $272 million of free cash flow at the end of the third quarter, which indicates over 100% advance versus the amount of $130 million in 2Q 2022. Furthermore, ERF’s free cash flow amount is far higher year-over-year compared with its amount of $101.2 million in 3Q 2021, which may cater to a scope of capability for more reliable distributions in case of stronger market outlook (see Figure 6).

Figure 6– ERF’s cash structure (in millions)

Furthermore, I looked at Enerplus Corporation’s profitability ratios in this section to assess how well the company can turn a profit and use its assets to make money for its investors. I have examined the profitability ratios for margin ratios to provide useful insights into the financial health of the company. I calculated the ratios in comparison to earlier quarters to be more helpful.

In general, margin ratios evaluate the ability of the company to turn revenues into profits in a number of ways. Notwithstanding the lower oil and gas prices in 2022, this energy company had stronger gross profit, EBITDA, and net profit margins in the third quarter compared with the second quarter of 2022. In minutiae, the total revenue of Enerplus Corporation increased slightly by 5% from $584.2 million in 2Q 2022 to $615.4 million in 3Q 2022, thereby affecting its margin ratios. In other words, ERF’s gross profit margin was 0.76 in the third quarter of 2022, which is higher year-over-year versus its amount of 0.69 at the end of 3Q 2021. Also, the company’s EBITDA margin was 0.83 in 3Q 2022, which is 20% higher than the previous quarter and 98% higher year-over-year compared with its amount of 0.51 in 3Q 2021. Moreover, Enerplus Corporation’s net profit margin, which is a final picture of how profitable the company is after all expenses, boosted by 19% to 0.50 in 3Q 2022 versus its previous amount of 0.42 at the end of the second quarter of 2022. As a result, healthy cash and capital conditions of Enerplus Corporation have affected its margin ratios and improved the scope of profitability opportunities (see Figure 7).

Figure 7 – ERF’s margin ratios

Summary

As the company has been able to improve its capital structure, margin ratios, and cash structure in the past few quarters, even with the current energy prices, ERF is able to cover its obligations and reward its shareholders. Also, the increasing oil and natural gas production in the Bakken region and Marcellus which account for more than 90% of the company’s revenue, is a good sign for Enerplus’ investors. However, with the current oil and natural gas prices, ERF’s 4Q 2022 and 1Q 2023 financial results are not going to be as strong as in previous quarters. The stock is a hold.

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