Will Enerplus Earnings Disappoint Energy Investors?

Enerplus (ERF 0.25%) will release its quarterly report on Friday, and in general, investors have been pleased with the performance of the Canadian energy company. Yet even with some promising assets in areas throughout North America, Enerplus earnings are expected to fall sharply from year-ago levels, reflecting some of the uncertainty affecting oil and gas producers in the current industry environment.

Enerplus was one of many companies once structured as Canadian royalty trusts, a favorable tax structure that gave it some of the same advantages that U.S. master limited partnerships enjoyed. When the Canadian government imposed new limits on the royalty-trust structure, Enerplus converted to regular corporate status, which hurt its dividend payout and made many investors flee from the stock. Let's take an early look at what's been happening with Enerplus over the past quarter and what we're likely to see in its quarterly report.

Stats on Enerplus

Source: Yahoo! Finance.

Can Enerplus earnings keep topping estimates?
Analysts have gotten more optimistic in recent months about the prospects for Enerplus earnings, boosting June-quarter estimates by $0.03 per share and raising their full-year 2013 predictions by more than 20%. The stock has responded favorably despite the anticipated year-over-year earnings drop, with shares gaining 18% since early May.

Most of Enerplus' gains came in the wake of the company's first-quarter earnings report, in which the company reported record production from assets in the Marcellus shale play in the eastern U.S. and in North Dakota. Marcellus production in particular rose 40%, and with hedges on only 35% of its natural gas production for 2013, the company has been able to benefit somewhat from the rise in natural gas prices as well as increasing its yields from its existing wells.

But equally important to investors has been the ability of Enerplus to keep its dividend up, and lately, better earnings have helped it decrease its payout ratio to more sustainable though still-high levels. Competitor Pengrowth Energy (NYSE: PGH) has similarly kept its monthly dividends constant in Canadian dollar terms, but Penn West Petroleum (NYSE: PWE) said in June that it would slash its third-quarter dividend almost in half as part of a broader strategic move involving staff cuts, asset sales, and other cost reductions in order to preserve cash for capital expenditures.

Similar questions have arisen about whether Enerplus should sell assets, and in June, the company made a minor sale of $80 million from various assets throughout Canada. But the company has also been willing to make smart purchases, including a $30 million pick-up of another Canadian property in which it had formerly had a roughly one-half interest. In general, though, Enerplus has a healthier balance sheet than some of its competitors, giving it more flexibility in choosing its strategic path.

In the Enerplus earnings report, watch for the company's latest update on how its income is matching up with its dividend payouts. Any threat to the dividend could punish the stock, resulting in shareholders seeing their recent paper-profits fade away. But as long as Enerplus maintains solid production results, it should be in a better position to benefit if natural gas prices keep rising.

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