Enerplus Corporation
Impressive Quarter All Around
Our view: Enerplus remains our favorite intermediate producer given its capable leadership team, consistently solid execution, strong balance sheet and rising shareholder returns. We are reaffirming an Outperform rating on Enerplus and boosting our one-year target price by $1 (5%) to $22 per share.
Key points:
Enerplus Corporation delivered impressive third-quarter results punctuated by 8% lower unit operating costs and 4% higher production of 103,200 boe/d relative to our estimates.
Shareholder Returns. Enerplus remains highly committed to a strong balance sheet and delivering shareholder returns. The company signaled that it is set to return about 70% of its free cash flow to shareholders both this year and in 2024 with an accent on share buybacks.
Improving Cost Profile. Enerplus indicated that it could end 2023 with total costs on operated wells of just under $7.8 million per well, and expects to see this figure fall by around 5% or so next year to around $7.3 million (in an $80 WTI world). This reduction will be driven by efficiency gains, reduced steel costs and locked-in contract pricing. The largest sources of variability in D&C costs next year will come from OCTG (oil country tubular goods, including drill pipe, casing and tubing) and diesel costs.
2023 Guidance. Guidance wise, Enerplus raised its 2023 mid-point production by 2% to 98,500 boe/d, including mid-point oil & liquids production of 61,000 bbl/d. The company’s capital investment guidance range for this year was tightened to $520-$540 million (vs. $510-$550 million previously). Enerplus also established fourth-quarter 2023 mid- point production guidance of 97,000 boe/d (including oil & ngls of 62,500 bbl/d) (see Exhibit 1).
Free Cash Flow. We peg Enerplus’ free cash flow (before dividends, including A&D) at $481 million in 2023 under our base and $463 million under futures. In 2024, we peg the company’s free cash flow at $501 million under our base outlook and $357 million under futures.
Relative Valuation. Under our base outlook, Enerplus is currently trading at a 2023E debt-adjusted cash flow multiple of 3.7x (vs. our Canadian Intermediate E&P peer group avg. of 3.6x) and free cash flow yield of 13% (vs. our peer group avg. of 14%). Looking ahead to 2024, Enerplus is trading at a 2024E debt-adjusted cash flow multiple of 3.2x (vs. our peer group avg. of 2.1x) and a free cash flow yield of 15% (vs. our peer group avg. of 29%). We believe the company should trade at an average/above average multiple given its consistent operating performance, capable leadership team, shareholder alignment and strong balance sheet, partly offset by portfolio concentration.