Income investors dread one thing more than anything else: the cutting of a dividend. That's why some investors in Enerplus (ERF -1.10%) must feel as if they've been walking on eggshells since the company halved its monthly distribution last June. Commodity prices hit this company's margins hard. So with little price relief coming in the past six months, is Enerplus going to be able to make its obligations, or are we going to see another cut? Let's look at the company's recent results to see what's on the horizon.
Finding a second wind
Last year proved to be a difficult one for Enerplus. Not only did the company cut its dividend in half, but it also sold of some of its assets in Manitoba and let some of its leases expire in the Marcellus region. These difficult choices were made so as to meet its obligations, and it looks as though those decisions are starting to pay off. Despite a reduction in total acreage, the company was able to increase daily production for the fourth quarter by 10.7% year over year and an overall increase in 2012 by 9%. It has also increased its liquids exposure by 5 percentage points in 2012, bringing it to an almost 50-50 split between gas and liquid production.
What's more impressive, though, is the company's ability to increase its net per BOE cash flow in the face of declining prices. In the fourth quarter, the company increased per BOE cash flow by 15% even though the company was getting 10% per BOE in sales. Much of this turnaround came from a turnaround in its hedging and some strong operational cost cuts. Much of the increase in operation efficiency can be seen in its Bakken operations. Enerplus recently reported that for what it considers a standard type well in the play (9,600-foot lateral with 29 fracking stages), it had shaved well completion costs by about $2 million. These cost cuts are allowing the company to consider drilling into the deeper Three Forks formation. If this region can be economically developed, it should greatly improve Enerplus' reserves.
Tough road still ahead
The increases in efficiency are probably just what the doctor ordered, because it looks as though there is still a pretty tough road ahead for Enerplus. Here are three things that need to be watched in the future:
1. Drilling and completion costs. While it's encouraging to see such a large cut in drilling and completion costs, the company is still sporting a very high completion cost of about $10 million for its Bakken wells. To put that into perspective, EOG Resources (EOG -0.48%) is one of the lower-cost drillers and is completing wells in the Bakken for about $6.5 million. Enerplus will need to bring its costs in the region down even further to keep pace with the big players in the region.
2. Questions regarding Three Forks formation. Both Continental Resources (CLR) and Whiting Petroleum (WLL), the top two landholders in the Bakken, have been reporting conflicting results regarding the potential of the play. While Continental has reported promising results from its test wells, Whiting has argued that those results are more of a product of Continental's land positions and might not be valid for the entire play. Enerplus has concentrated much of its efforts in this region, so any news regarding the play will have large effects on the company. We will need to wait and get a more clearer picture of this play before we can make a judgment call on it.
3. High transportation costs. The biggest weakness for Bakken players has been and continues to be takeaway capacity. Enerplus relies heavily on Enbridge's (ENB 1.71%) Mainline pipe network, but its has also needed to lean on rail to takeaway about 30% of all Bakken crude. Rail costs have been as high as $20 per barrel, which is taking a big bite out of the sale price for a barrel of oil. Enbridge is in the process of expanding its Bakken crude collection networks, so hopefully those high takeaway costs will start to subside soon.
What a Fool believes
A tip of the cap to Enerplus for making the moves it did. The selling of assets and the dividend cut may have spurned investors, but it helped to secure the long-term health of the company. For investors who think the big distribution cut makes Enerplus a less attractive cut, it might be time to re-evaluate that position. Since the halving of the distribution, the share price has almost halved as well. So people looking to get into the stock today would realize a distribution yield on par with pre-cut levels. Add this to the cost-cutting measures, and Enerplus is poised to do well for investors in the future. I'm going to make an outperform CAPS call on this one to keep me honest.
Enerplus is moving to be a bigger player in the Bakken, and it could pay off very well. To better understand what the move to the Bakken could mean for the company, take a look at our premium report on another Bakken player, Kodiak Oil & Gas. This report will give you a strong sense of what it means to be a Bakken producer and the factors in you need to watch to monitor the health of these kind of companies. For your own copy of this premium research report, which also comes with a year of updates and analysis, click here.
