North America's energy boom has been nothing less than spectacular. Since 2008, America's daily production of oil has grown 49% from 5 million barrels/day (MBD) to 7.4 MBD, with the Energy Information Administration (EIA) projecting another 23% increase (to 9.1 MBD) by 2015.
Natural gas production has been soaring, with shale formations such as the Marcellus increasing production 14-fold since 2007 and is expected to double again by 2035.
And these booms are likely to continue for decades due to North America's enormous shale energy reserves. For example, the U.S. has an estimated 665 trillion cubic feet of recoverable (at today's price and technology) shale natural gas, 58 billion barrels of shale oil; while Canada holds 9 billion barrels of oil but 573 trillion cubic feet of shale gas. As a note, total shale oil estimates for the U.S. are 3.1 trillion barrels and 20,450 trillion cubic feet of gas but higher prices and more advanced technology will be needed to make these recoverable.
Meanwhile, up in Canada there are an estimated 2.5 trillion barrels of oils sands with 170 billion barrels currently recoverable.
Companies such as Enerplus (NYSE:ERF) and Suncor Energy (NYSE:SU) are attempting to enrich themselves (and investors) by tapping into these immense hydrocarbon reserves, but the oil (and gas) game can be a messy one and hiccups will always occur. This article will explain why Enerplus' recent difficulties are largely behind it and why long-term dividend income investors can expect high (and growing) monthly dividends from it in the future. The article will also take a look at the recent bad news for Suncor to see if the investment thesis still holds for the tar sands giant.
Why Enerplus has turned the corner
As seen above, Enerplus has suffered a series of catastrophic dividend cuts -- most recently in mid-2012. The reason for these cuts was a combination of large drops in oil and gas prices following the 2008 financial crisis and the 2011 change in Canadian tax laws, which changed Enerplus from a tax-privileged royalty trust to a regular corporation. The higher taxes and 2012's record low natural gas prices caused the dividend to be unsustainable so management wisely cut it. As I'll now explain, Enerplus has nothing but blue skies ahead in the form of opportunities that have analysts at S&P Capital IQ predicting 74% CAGR earnings growth and 39% CAGR dividend growth over the next decade.
Enerplus' future hyper-growth is from its exposure to three major oil and gas regions: Alberta tar sands, the Bakken/Three Forks shale, and the previously mentioned Marcellus shale.
Enerplus has successfully cut costs by 11.1% since 2012 and is guiding for an additional 3% cut in 2014.
Meanwhile the company has been monstrously successful at replacing its reserves, with a 238% replacement in 2013 and a stunning 400% replacement of its Fort Berthold field's production.
This same field has experienced 340% production growth since 2011 and Enerplus is using a new technique called downspacing (spacing wells closer together) to increase production another 22% this year at lower cost while simultaneously increasing its reserves.
Two of its latest wells testing this technique, Hognose and Ribbon, resulted in 2,300 and 2,500 barrels/day of production -- its previous wells produced about 1,000 barrels/day.
Thanks to the success of these new wells, Enerplus was able to report a 68% increase in free cash flows this quarter compared to Q1 2013, and the good news doesn't end there.
In Enerplus's Marcellus holdings production has grown by over 750% since 2011 (reserve growth of 415%) with 2013 growth being 90% for production and 168% for reserves.
The key to this success is the same downspacing technique that has resulted in more wells, each with increased production (15,000-20,000 cubic feet/day of gas) and greater access to trapped gas, thus growing reserves. With lower costs, Enerplus is able to achieve 72% internal rates of return for these latest wells.
Why Suncor is still a buy
In my most recent article about Suncor Energy, I reported on the company's recent record quarter. Now I bring bad news of the cancellation of Suncor's joint venture with Total and Occidental Petroleum, the $11 billion Josyln North oil sand mine. This mine was supposed to produce 120,000 barrels/day for 20 years, however, cost overruns resulted in Total estimating a breakeven oil price of $100 (Brent oil).
With Brent now at $110, Suncor's partners felt that internal rate of return was insufficient to continue, especially since Suncor's Fort Hills mine was still achieving a 13% internal return. However, with Canadian tar sands production expected to quadruple from 1.6 mbd to 6.2 mbd by 2030 and Suncor producing 24% of all tar sands oil, long-term investors can expect the company's strong returns (and strong dividend growth) to continue.
Enerplus's success at cutting costs, replacing reserves and growing production means that the company's future is brighter than ever. Its current dividend is not only safe but likely to grow strongly in the future. Similarly, Suncor's recent mine cancellation, though a short-term blow, doesn't alter the company's long-term growth story. Suncor Energy has been one of the decade's best dividend growth stocks and I expect the next decade to similarly result in market-beating total returns. I consider both Enerplus and Suncor to be long-term buys.