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Sunday, September 25, 2022

Enerplus: Strong Cash Flow Prospects In H2 2022 & FY23 (NYSE:ERF)

Leonid Ikan

Enerplus Corporation (NYSE:ERF) now looks capable of generating close to US$1.3 billion in positive cash flow during the second half of 2022 and 2023 combined at current strip prices. This would allow it to eliminate its net debt by the end of 2023 as well as reduce its outstanding share count below 200 million. It also has the option of increasing its dividend if it diverts some of its funds away from share repurchases.

Enerplus is performing well operationally and I estimate its value at a bit over US$18 per share in a long-term (after 2023) $70 WTI oil and $4.00 NYMEX gas scenario now. This is up a couple dollars from my prior estimate of Enerplus’s value due to its strong operational performance combined with an increase in my outlook on long-term natural gas prices.

This report uses US dollars unless otherwise noted. The exchange rate used is US$1 to CAD$1.33.

Canadian Asset Divestiture

Enerplus sold some of its Canadian assets to Journey Energy for total consideration of around US$109 million (before closing adjustments and based on the exchange rate at that time). It is receiving around US$61 million in cash, 3 million common shares in Journey Energy and a US$34 million monthly amortizing, interest-bearing secured loan that is due October 2024.

These assets had net production of approximately 3,400 BOEPD (60% oil). The sale price was relatively modest, as Journey estimates that annualized operational cash flow (based on Q4 2022 production and $90 WTI oil) would be approximately US$48 million. However, the deal advances Enerplus’s attempts to exit Canada and it hadn’t drilled new wells at those assets for several years.

2H 2022 Outlook

Despite its Canadian asset sale, Enerplus still expects significant production growth in 2H 2022, including roughly 15% liquids production growth from Q2 2022 to Q3 2022. Based on its updated full-year guidance, Enerplus expects to average approximately 105,700 BOEPD in production during 2H 2022, including approximately 65,500 barrels per day in liquids production.

At current strip prices for the second half of 2022 (around $90 WTI oil and $8 NYMEX gas), Enerplus is projected to generate $1.273 billion in oil and gas revenue before hedges. Enerplus’s 2H 2022 hedges have around negative $154 million in estimated value.

Units

$ Per Unit

$ Million USD

Oil

10,241,650

$90.00

$922

NGLs

1,807,350

$28.00

$51

Natural Gas

44,424,000

$6.75

$300

Hedge Value

-$154

Total

$1,119

Enerplus is projected to generate $511 million in positive cash flow in the second half of 2022 before dividends. If Enerplus keeps its dividend at $0.05 per share for its December dividend payment (although it has room to increase it again), it would have $23 million in dividend payments for the second half of 2022.

$ Million USD

Production Taxes

$89

Operating Expenses

$197

Transportation

$81

Cash General And Admin

$22

Cash Interest

$8

Capital Expenditures

$190

Current Tax

$20

Dividends

$23

Total Expenses

$630

Debt And Share Repurchases

Enerplus is now projected to end 2022 with approximately $265 million in net debt. This assumes that it puts 40% of its 2H 2022 cash flow towards debt reduction and the other 60% towards dividends and share repurchases. This also includes the proceeds from its Canadian asset sale.

Enerplus could theoretically end up with around 216 million shares outstanding by the end of 2022 if it keeps its quarterly dividend at $0.05 per share and puts $284 million towards share repurchases in the second half of 2022.

Notes On Valuation

I now estimate Enerplus’s value at a bit over US$18 per share at long-term (after 2023) $70 WTI oil and $4.00 NYMEX gas. This increases to approximately US$21 per share at long-term $75 WTI oil and $4.50 NYMEX gas. I have boosted my long-term outlook on natural gas prices to that $4.00 to $4.50 range.

Enerplus’s estimated value has increased due to its strong operational performance and its large amount of share repurchases at relatively favorable prices. It repurchased 25.6 million shares between August 2021 and July 2022 at average price of $11.14 per share.

Enerplus could eliminate its net debt during 2023 while reducing its share count well under 200 million (although it would need to renew its normal course issuer bid again). Enerplus’s dividend yield remains relatively modest though while it primarily focuses on share repurchases.

Conclusion

Enerplus appears capable of generating close to US$1.3 billion in positive cash flow during the second half of 2022 and 2023 combined at current strip prices. This should allow it to continue repurchasing large amounts of shares, while it also has the option of increasing its dividend. Enerplus should also be able to eliminate its net debt during 2023 if it chooses to allocate around 35% of its free cash flow towards debt reduction.

I estimate Enerplus’s value at a bit over US$18 per share in a long-term (after 2023) $70 WTI oil and $4.00 NYMEX gas scenario. This increases to approximately US$21 per share at long-term $75 WTI oil and $4.50 NYMEX gas.

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