Most mid-cap exploration and production players don't pay out a dividend, let alone one yielding north of 4% that is paid out monthly like Enerplus Corp (NYSE:ERF). In a balance of income and growth, Enerplus pays out a solid dividend while also guiding for production to grow by 6%-10% this year.
With assets spanning from Alberta to Pennsylvania, Enerplus has diversified its production base across North America. While some long-term investors have gotten burned as Enerplus scaled down its dividend to live within its means, this E&P player may have finally turned a corner. Recently, Enerplus updated investors on its Williston Basin operations, and numerous articles have come up touting the new information, but that shouldn't cloud over its very profitable and growing Canadian business.
Up in Canada, Enerplus plans on spending 40% of its capex budget this year to grow 35% of its output. The majority of that capex (25% of its overall budget, 62.5% of its Canadian capex) will target the Canadian Oil Waterfloods portion of its assets, which should enhance free cash flow for several reasons.
- The low average decline rate of 14% per year for Enerplus' waterfloods operations allows for free cash flow generation to last longer and reduces the need for enormous budgets to maintain output.
- Being weighted toward oil has enabled these assets to generate substantial amounts of free cash flow because of the high margins of oil production, as FCF from these assets stood at $116 million last year and is forecasted to come in at $152 million this year.
- Production is expected to grow by 10% or more this year, even as capex is wound down to 51% of net operating income versus 58% last year.
- Proven plus probable reserves stands at 87 million barrels of oil equivalent, with the possibility of additional reserves being uncovered through 160 potential drilling locations.
Many analysts and investors are focusing on Enerplus Corp's recent Bakken and Three-Forks upside for good reason, but its Canadian Oil Waterfloods assets have a proven history of free cash flow generation, which should only continue to grow. Beyond just generating free cash flow, Canada also offers Enerplus tons of upside through shale exploration and development programs.
The shale revolution up north
America is the front-runner in the shale revolution, but our neighbors up north are taking heed and betting big on plays like the Duvernay. In the Duvernay shale play, Enerplus Corp has built up a 85,000 net acre position over the past three years at a very low cost of roughly $750 an acre.
So far, Enerplus has completed two horizontal wells in the Duvernay this year, offering investors a glimpse at what it could hold. Currently Enerplus sees the Duvernay as a liquids-rich opportunity, which could offer strong levels of free cash flow in the years to come. While development costs will take away from free cash flow in the near term, investing for future growth is crucial.
Another Canadian oil and gas company, Encana Corporation (NYSE:ECA), also has high hopes for the Duvernay. With five rigs operating in the area, Encana Corp was able to spud two eight-well pads in the first quarter. Encana's results are encouraging, as management stated that "liquids yields remain strong." On top of promising production results, Encana is also finalizing its midstream operations in the Duvernay to create substantial takeaway capacity in what could become another symbol of the shale revolution.
For both Enerplus and Encana, the Duvernay shale still remains an emerging play that needs a lot of upfront capital to build out all the infrastructure necessary to produce hydrocarbons. But investing is all about the long term, and companies willing to look past the near-term costs offer better returns.
Canada is home to some immense opportunities for E&P players that shareholders shouldn't overlook. By growing free cash flow from its waterflood operations, Enerplus can put some of that cash back to work by developing emerging shale plays like the Duvernay. Having bigger players like Encana also develop the play doesn't hurt, as Enerplus can leverage Encana's well results and midstream infrastructure to target the liquids-rich areas of the Duvernay. While every energy investor loves a good Bakken/Three-Forks update, don't let that cloud over other strong part of a company's operations. As an added bonus, Enerplus pays out a 4% yield that should start growing again very soon.