Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to North American oil, gas, and liquid natural gas exploration and production company Enerplus (ERF) and I'll show you why it is the sugar and spice and everything nice that income investors have been looking for in an energy company.
Source: Enerplus.
No company is without risks
As we do every time we examine a great dividend stock, let's begin with the risks involved and then move into why it should be able to overcome these adversities over the long run.
To begin with, Enerplus was once a Canadian income royalty trust -- its main acreage assets are found in Canada, although it has wells in the Williston Basin and Marcellus Shale within the U.S. -- but lost its privileged tax status due to changes enacted in Canada. The result was that as of January 2011, Enerplus converted to become a normal corporation. Higher taxes associated with being a normal corporation made its prior dividend payouts unsustainable by mid-2012 and caused quite the exodus from investors. In fact, in the 18-month period following its Jan. 1, 2011 conversion shares fell by approximately 60%.
Another key point is that commodity prices, exchange rates, and the weather are beyond Enerplus' control. Although the company maintains a fairly impressive mix of product -- 52% natural gas, 44% oil, and 4% natural gas liquids -- it also has to be nimble enough to adjust its production to periods of commodity-based decline. For example, if natural gas prices dipped below $2/MMBtu again, as they did in 2012, there's not much Enerplus would be able to do to shield its production in the Marcellus Shale from feeling the pinch. Similarly, if a warmer winter means less energy usage, then the demand for natural gas and other energy sources could drop, negatively affecting a number of asset suppliers along the way.
Source: Enerplus.
Finally, there's the execution risk of developing its natural gas and oil sands assets in Canada. Although the company is only toting around $1.02 billion in net debt, its capital expenditures in that country over the coming years to develop its acreage could weigh on its bottom line and investors.
The Enerplus advantage
The first thing Enerplus investors need to understand is that while there is commodity-based risk involved with its production, the company attempts to mitigate this risk through hedging its production to ensure a minimum level of cash flow on a forward basis. Based on its first-quarter results, Enerplus has 60% of its crude oil production and 45% of its natural gas production hedged this year. In 2015, that figure drops to 10% of its forecasted oil production and 20% of its forecasted natural gas, though this figure is expected to rise as the year presses on. With a minimum level of cash flow expectation due to these hedges, Enerplus is able to pay out its dividends with some degree of confidence, as well as establish capital expenditure budgets that it can actually stick to and to which it has decent long-term visibility.
Source: Enerplus.
Also, as Foolish energy analyst Matt DiLallo pointed out just last week, Enerplus' push into downspacing could give the company production yield advantages that its peers simply aren't seeing. Downspacing, or the idea of placing more than one well within a traditionally defined well space, helped yield 64,000 barrels of oil in a 26-day test on Enerplus' Ribbon well. As Matt notes, this roughly 2,500 barrel of oil per day yield would place it among the highest productivity wells within its Bakken portfolio of wells and may give it a way of getting more/quicker yield out of its own Bakken acreage.
Another point of contention is that the Bakken Shale represents some of the highest quality crude oil found in the U.S., and as such Enerplus has a number of options available to receive the best possible price for its recovered oil. When there are divergences between Brent and West Texas Intermediate, Enerplus can simply choose to ship its crude by rail past Cushing, Okla., to Louisiana, where it can receive the Brent price, minus shipping costs. When that's not an option, shipping directly to Cushing or even selling at the wellhead could make sense. The point being that Enerplus is sitting on prime acreage that it's able to use to its advantage.
Show me the money!
But if there's one carrot that Enerplus dangles over investors month in and month out, it's the company's dividend. That's because it pays its shareholders a stipend each and every month! Although its payout has fluctuated wildly since 2011 when it changed its status from a trust to a corporation, current shareholders over the past year have been privy to payouts ranging from $0.0805 per share on the low end, to as much as $0.089 in May 2013. Over the trailing year, this has equated to approximately $1.01 in payments received for a cumulative yield based on yesterday's close of a U.S. Treasury-thumping 4.7%.
Graph by author, Source: Nasdaq.com.
While it's certainly possible this dividend will remain somewhat volatile over the coming years as Enerplus initiates new projects in Canada and attempts to squeeze as much production as is imaginable out of the Williston Basin and Marcellus Shale, I suspect its steady cash flow and improving oil production should allow for it to maintain a healthy yield in the 4%-5% range.
