Updated on April 2nd, 2019 by Josh Arnold
As an oil and gas producer, Enerplus Corporation (ERF) suffered from the downturn in commodity prices from 2014-2016.
Indeed, after peaking at $24 per share in 2014, Enerplus fell to below $3 in early 2016. Shares have rebounded since then but are still nowhere near prior highs, trading for just over $8.
However, this enormous price decline has setup potential new investors with a much better value proposition.
In addition, Enerplus benefits from a strong asset base, which fuels its steady monthly dividends. The stock has a 1.1% annualized dividend yield, which is significantly less than the 2% average dividend yield of the S&P 500 Index.
One advantage for Enerplus is that it pays its dividend each month, rather than on a quarterly or semi-annual basis. Monthly dividends give investors the ability to compound dividends even faster.
Enerplus is one of just 41 stocks that pay monthly dividends. You can access the complete database of monthly dividend stocks below:
This article will discuss Enerplus’ business model, and whether it is an attractive option for income investors.
Enerplus was established in 1986. Today, it is a producer of crude oil and natural gas assets in Canada and the U.S. It is a small-cap stock, with a market capitalization of $2 billion.
Enerplus has high-quality assets, with operations in some of the premier oil and gas fields in North America, such as the Bakken/Three Forks field in North Dakota.
Another major area of production is the Williston Basin, where Enerplus produced 44,000 barrels of oil equivalents per day in Q4 of 2018.
Source: February 2019 investor presentation, page 10
Its natural gas assets are primarily located in the high-quality Marcellus shale, one of the most economically-sound natural gas fields in North America.
Source: February 2019 investor presentation, page 17
The vast majority of Enerplus’ production comes from the U.S.
The Canadian Oil Waterfloods area brings 9,700 barrel equivalent production per day, while the Williston Basin provides 47,400.
In addition, the Marcellus Shale field produces 211 million cubic feet per day of gas.
Source: February 2019 investor presentation, page 2
Enerplus had a productive year in 2018. The company managed to boost liquids production by 22% year-over-year. It also generated $160 million in free cash flow, good for a free cash flow yield on the current market capitalization of about 8%.
Enerplus returned $108 million of that cash to shareholders via dividends and buybacks. And finally, it increased its proved-plus-probable reserves by a respectable 8%.
Moving forward, the company hopes a combination of higher commodity prices, cost reductions, and production growth will help sustain the positive momentum.
Enerplus’ first growth catalyst is higher commodity prices. While oil and gas prices are up significantly from their 2016 lows, they are still a long way from their 2014 peak levels.
Today, WTI crude trades for about $60 per barrel. The good news is that Enerplus funds its production at $50 per barrel, so it is in a good spot today.
The company obviously cannot control oil prices. Instead, Enerplus is focusing on managing what it can control.
To that end, one initiative the company has undertaken is reducing its costs per barrel. Enerplus’ margins have expanded considerably recently.
Source: February 2019 investor presentation, page 18
The company has boosted its cash margin, for instance, in the Marcellus project from just 29 cents in 2015 to a projected $1.45 for this year on each thousand cubic feet of gas.
Lastly, Enerplus is investing to ramp up production.
Source: February 2019 investor presentation, page 3
Enerplus sees liquids production growth at 9% at the midpoint of guidance on top of strong gains in 2018. Growth should be even higher in 2020 and 2021 as the company continues to invest in higher production capacity.
In addition, operating leverage above the funded level of $50 per barrel for WTI crude is significant. Should oil prices remain at the current ~$60 per barrel or move higher, Enerplus stands to gain enormously.
Of course, this leverage works both ways and if prices moderate, earnings will suffer.
Approximately 80% of 2019 capital spending will be allocated to the Williston Basin. This is consistent with prior years as Enerplus continues to bet big on its major production area.
Enerplus recently declared its April dividend and it came in at approximately $0.01 in US dollars. That works out to the current yield just above 1%, so Enerplus certainly isn’t a pure income stock.
An important consideration for investors is dividend sustainability. One of the benefits of a low dividend yield is that it is easier to sustain the dividend payout when business conditions deteriorate.
For example, Enerplus earned $180 million in free cash low in 2018, spending $79 million on share repurchases, and just $29 million on dividend payments.
That means the dividend is extremely well covered and shouldn’t be at any meaningful risk of a cut.
Plus, the company has a solid balance sheet.
Source: February 2019 investor presentation, page 8
With a low dividend payout, combined with cost cuts, Enerplus has used excess capital to pay off debt. Net debt to trailing-twelve month adjusted funds flow was 2.5x in 2015, but is just 0.4x today.
Enerplus is based in Canada, which means there are also unique tax considerations for U.S. investors.
The first is that the company’s dividends will be issued in Canadian dollars, which exposes U.S. investors to currency risk. This means that even if the dividend declared is the same month after month, the amount U.S. investors receive will fluctuate.
In addition, investors should consider that buying stock in companies based in Canada may result in withholding taxes. Dividends received in Canadian dollars are subject to a 25% withholding tax.
The good news is that the withholding tax is waived for U.S. investors who hold the stock in a qualified retirement account, such as a 401(k) or IRA.
Enerplus has a low dividend yield, and the company has made no indication it plans any significant dividend expansion at this stage. Management appears more interested in deleveraging the balance sheet and investing for future production growth.
The company is benefiting from rising commodity prices and its cost-cutting program. In addition, it has drastically improved its balance sheet over the past few years.
Enerplus may not be attractive for investors looking for high dividend yields, but it could be viewed more attractively as a growth stock if oil and gas prices continue to rise.