Can This Oil Services Company Really Shrink to Grow?

Whenever a company reduces its growth outlook, the market's knee-jerk reaction is to sell off in volumes. So when Enerplus Resources Fund (NYSE: ERF  ) reduced guidance for 2013, the market acted predictably – which could mean good news for long-term investors.

Nearly every company that has reported earnings or revenue shortfalls this quarter has mentioned "lower-than-expected gas prices" or something similar in an earnings release or conference call. So by now, investors should not be surprised that Enerplus had similar issues this quarter. The company posted a net loss of C$63.5 million ($63.6 million), a near $180 million drop from last year's quarterly income of $111 million. The big turnaround in income came from a drop in gas prices and an asset ceiling writedown. Enerplus expects a 2% drop in oil and gas production for the rest of 2012.

The drop of gas prices should not be of great concern for investors, but the company rolling back its production should raise an eyebrow. During the company's conference call last Friday, company CEO Gordon Kerr detailed how the company lowered its outlook for 2013 and halved its dividend. The company also announced it sold its 1,600-barrel-per-day Manitoba assets and does not intend to extend its leases for Marcellus Shale plays in Maryland and West Virginia.

Budging into a crowd
Natural gas prices don't just fall to 12-year lows because of mere speculation. Clearly, there was something amiss in the market. Several oil and gas companies look to grow in hopes of becoming prominent players in North American energy independence. Unfortunately, for these companies production has outpaced demand.

Several companies are finally seeing the writing on the wall and ramping down their drilling operations. Other companies have also rid themselves ancillary assets. Last quarter, Chesapeake Energy (NYSE: CHK  ) sold over $3 billion in assets to a Royal Dutch Shell (NYSE: RDS-B  ) subsidiary. Even giants like BP (NYSE: BP  ) have been looking to shed some less-productive fields; it sold $990 million in Green River Basin properties to Linn Energy (Nasdaq: LINE  ) back in June.

Ramping down production and cutting some shale plays loose isn't ideal, but when the market deals you a bad hand, sometimes it's better to do what is necessary to remain profitable in the near term while holding out for better times ahead. This is what Enerplus is doing right now, and it should signal to investors that the company is willing to do what is best for its own long-term sustainability.

What a Fool believes
In the wake of all these production drops and asset sales, there may be a silver lining to the story for Enerplus. A recent study by the Energy Resources Conservation board and the Alberta Geological Survey show that the province may be sitting on over 423-billion barrels of oil and 3,424-trillion cubic feet of natural gas. Since Enerplus has several tight gas plays in some of the more resource-rich regions from this study, the sale of those aforementioned assets may not reduce the reserves held on the company's books.

The oil and gas boom in North America provides investors with several lucrative opportunities. Both the United States and Canada keep finding more and more resources every day. The challenge for investors in this space is to make sense of this boom and how to play the best hand. Our analysts at the Motley Fool keep a keen eye out in this space and have identified "The Only Energy Stock You'll Ever Need." We have made a special report outlying this unique opportunity within the oil and gas space. For your own free copy, click here.


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  • Report this Comment On November 14, 2012, at 6:31 PM, jasjfarrell wrote:

    I bought share of ERF a few months ago strictly for the monthly dividend. Even when they cut it to $.09 per share, I continued to hold. Even over the last few days, as it dropped, I added more shares. I'm hoping the author is correct and the stock will increase in value long term.

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