Enerplus Corporation On the Road with Ian Dundas
Our view: Enerplus remains our favorite intermediate producer given its capable leadership team, solid operating execution, exceedingly strong balance sheet, and abundant shareholder returns. We reiterate our Outperform rating and one-year price target of $20.
Key points:
Our recent institutional meetings in California with Enerplus Corporation’s President and CEO, Ian Dundas, were upbeat and delved into the company’s operating momentum, strategic priorities, shareholder returns, and appetite for A&D. We like what we heard, and we remain puzzled by Enerplus’s relative market underperformance this year. In our view, this underperformance has more to do with fund flows (and perhaps a lower likelihood of a substantial issuer bid in the near term) than anything we see operationally or financially.
A&D Outlook. Enerplus intends to remain patiently opportunistic on the A&D front given its comfortable drilling inventory in the Bakken. The company has framed 655 net drilling locations in its core (530 locations) and extended core (125 locations) areas of the Bakken as of year-end 2022 —or more than a decade of drilling inventory at a 50–60 wells per annum development pace. If Enerplus were to acquire, the Bakken would remain its first choice.
Operations Update. Enerplus expects to bring approximately 19–22 net operated wells (including 6 in Fort Berthold and 11 in Little Knife) on- stream in the Williston Basin during the second quarter. This activity includes 3–5 refracs at Little Knife and is set to deliver strong oil & liquids growth as the second half unfolds. Enerplus’s second-quarter oil & liquids production is expected to be flat to modestly higher than the first-quarter rate of 56,734 bbl/d and then see robust growth into the third quarter. A majority of Enerplus’s drilling inventory is spaced for 2-mile laterals, though it sees potential for 3-mile laterals primarily in its western Williams County acreage. Overall, Enerplus sees about 60 refracture stimulation opportunities (all in Dunn County acreage) aimed at adding incremental production and EUR in under-stimulated wells within the Bakken. Though still early days, the company highlighted the cost of refracs to be about $4.5 million per well, or a little over half of Enerplus’s $7.8 million total well cost.
Free Cash Flow. Under futures, we peg Enerplus’s free cash flow (before working capital movements and dividends, excluding A&D) at $327 million in 2023 ($72 WTI, $2.56 Henry Hub).
Relative Valuation. Under futures, Enerplus is currently trading at a 2023E debt-adjusted cash flow multiple of 3.6x (vs. our North American Intermediate E&P peer group avg. of 4.0x) and free cash flow yield of 11% (vs. our peer group avg. of 7%).