Enerplus’ 2019 Outlook Grounded in Free Cash Flow


Enerplus’ Bottom Line:

  • Enerplus (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”ERF” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) management has made it clear that profitable growth, strong free cash flow generation, and maximizing shareholder returns are its top priorities going forward.
  • The company aims to generate double-digit returns on capital employed in 2019 and also aims to remain cash flow positive based on prevailing oil prices, though an improvement in commodity prices could help it generate meaningful free cash flow.
  • Enerplus’ three-year outlook suggests that it plans to increase liquids production in the double digits going forward, generating positive free cash flow at a West Texas Intermediate (WTI) oil price of more than $50 per barrel and NYMEX natural gas price of over $3/Mcf.

2019 Capital Expenditure and Operational Update:

  • Enerplus has guided for average production in the range of 94,000-100,000 barrels of oil equivalent per day for 2019. Crude oil and natural gas liquids will average 52,500-56,000 boe/day on an average.
  • The company also expects an increase in operating expenses this year thanks to the higher contribution of liquids in the production mix, as well as an increase in the deployment of electronic submersible pumps in North Dakota.
  • Enerplus had to pull back its capital investments in the fourth quarter of 2018 on account of the oil price volatility, so its first-quarter production will drop as compared to the final quarter of 2018. The company expects production to increase meaningfully in the second half of 2019.
  • Enerplus has guided for capital expenditure in the range of $565 million-$635 million for 2019, the mid-point of which represents a slight increase over the 2018 capital expenditure of $593.5 million.
  • The company will be directing 80% of its capital budget toward North Dakota development this year as it funds a 42 net well drilling program with an aim of achieving 30 to 38 net operated completions.
  • Enerplus management claims that it has price protection on over 60% of its forecasted oil production for the year by way of three-way collar structures. It has purchased put options at an average WTI price of $55 per barrel with an upside potential up to $65/barrel WTI.

Growth Forecasted in Three-year Outlook:

  • Enerplus’ 2019 annual liquids production will increase 9% at the mid-point of its guidance. The company expects production growth to pick up pace in 2020 and 2021, forecasting annual liquids production growth in the range of 10-13%.
  • The company’s production growth will be driven by its high-return, light oil assets in North Dakota.
  • Enerplus will balance its capital spending over the next three years based on the adjusted funds flow generated at the WTI oil price of $50/barrel and $3 per Mcf of NYMEX natural gas.

Enerplus’ Guidance and Balance Sheet are Positives:

  • Enerplus’ forecasts are based on a WTI oil price between $50 and $55 per barrel and an NYMEX natural gas price of $3.00/Mcf. WTI oil is trading right in the middle of that range right now, while natural gas is at a lower level. So the company might have to pull back its capital expenditures based on the end-market scenario.
  • The good thing about Enerplus is that it seems to have a decent balance sheet that’s not highly levered. The company has total debt of C$661 million and total cash of C$347 million, and has generated over C$652 million in operating cash flow over the past year.
  • Enerplus looks well-placed to weather any further decline in oil prices, and investors should have more clarity about the company’s operations when it releases its full-year results on Feb. 22.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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