Enerplus Corporation Strong Second-Half in Store
Our view: Enerplus remains our favorite intermediate producer given its capable leadership team, solid execution, strong balance sheet and rising shareholder returns. We are reaffirming an Outperform rating on Enerplus and our one-year target price of $19 per share.
Key points:
Enerplus Corporation delivered broadly in-line second-quarter results amid 2% higher oil & liquids production of 58,214 bbl/d and free cash flow generation of $16 million (excluding A&D). The company repurchased $55 million (3.8 million) of its common shares in the second-quarter and boosted its dividend by 9% to an annualized rate of $0.24 per share (1.4% yield).
Shareholder Returns. Enerplus is committed to returning at least 60% of its second-half free cash flow to shareholders with an accent on share repurchases, which should result in over 70% of full-year 2023 free cash flow returned. Subsequent to quarter-end, the company completed its issuer bid in July and plans to renew its 10% NCIB program in August.
Operations Update. Enerplus brought on-stream its Bice and Hay Draw pads in the Little Knife area, with 9 wells averaging gross peak IP-30 rates of 1,900 bbl/d per well. The company remains encouraged by its well performance at Little Knife thus far. Additionally, Enerplus completed 4 refracture stimulations (75% wi) in the second-quarter within its Dunn County acreage, with 3 of 4 wells on-stream for more than 30 days exhibiting average gross peak IP-30 rates of 500 bbl/d per well. In Williams County, the company expects to provide an update alongside its third- quarter results surrounding well performance on 5 operated wells (2-mile laterals) brought on-stream on the eastern edge of its acreage, which is the only operated activity planned in Williams County this year.
2023 Guidance. Guidance wise, Enerplus modestly increased its mid-point production guidance by 1% to 96,500 boe/d including mid-point oil & liquids production of 60,000 bbl/d. Capital investment has been revised to $510-$550 million (vs. $500-$550 million previously) (see Exhibit 1).
Free Cash Flow. We peg Enerplus’ free cash flow (before dividends, including A&D) at $386 million in 2023 under our base outlook and $455 million under futures.
Relative Valuation. Under futures pricing, Enerplus is currently trading at a 2023 debt-adjusted cash flow multiple of 3.6x (vs. our North American Intermediate E&P peer group avg. of 3.8x) and free cash flow yield of 13% (vs. our peer group avg. of 9%). 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 off-set by portfolio concentration.