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Can This Oil Services Company Really Shrink to Grow?

Tyler Crowe
November 14, 2012

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 Roya