Enerplus Corporation Update with Ian Dundas
Our view: Enerplus remains our favorite intermediate producer given its consistently solid execution, balance sheet strength and bolstered scale in North Dakota post its two acquisitions in 2021. The company remains committed to further shareholder returns—and looks upon its stock as representing attractive value. We are reaffirming an Outperform rating on Enerplus and boosting our one-year target price by $3 to $17 per share.
Key points:
Management Update. Our recent discussion with Enerplus’ President & CEO, Ian Dundas, was candid and delved into the company’s free cash flow allocation, North Dakota operations and inflationary pressures. The company is contemplating an investor open house this coming spring.
FCF and Shareholder Return Game Plan. Enerplus continues to exercise flexibility when it comes to shareholder returns and looks upon its common shares as offering attractive value. In conjunction with its third-quarter results, the company raised its common share dividend 8%, and boosted its share repurchase program to $200 million. The company repurchased $142.7 million under this program in the fourth-quarter of 2021, with the $57 million balance expected to be completed in the first-quarter of 2022. Looking ahead, the company will continue to assess different capital returns, including base dividend growth, special/variable dividends, and further repurchases under its NCIB.
North Dakota Update. Enerplus has achieved comfortable scale in North Dakota post its Bruin and Hess Bakken acquisitions in 2021, but will remain opportunistically driven should further assets surface. As it stands, Enerplus sees over 10 years of Tier 1 drilling activity with its current Bakken inventory. Based on our discussion, it would surprise us to see Enerplus acquire anywhere but in the Bakken. To mitigate inflationary pressures, Enerplus has entered into arrangements covering about 75% of its planned 2022 North Dakota activity, and has also begun entering into fixed contracts for 2023. Enerplus is budgeting for D&C costs of US$6.0 million per well in 2022, up slightly from its pacesetter of just under US$5.7 million in 2021.
2022 Outlook. Guidance wise, Enerplus has already framed a preliminary 2022 budget which points towards average production of 122,000 boe/d in the context of a $500 million capital program. The company is refining this outlook as it relates to non-operated activity levels in North Dakota and elsewhere, along with inflationary pressures. We do not anticipate any deviations from the preliminary outlook put-forth by Enerplus when its finalized 2022 budget is released.
Relative Valuation. At current levels, Enerplus is trading at a 2022 debt-adjusted cash flow multiple of 3.2x (vs. our North American intermediate peer group avg. of 3.5x). We believe the company should trade at an average/above average multiple given its consistent operating performance, capable leadership team and strong balance sheet, partly off- set by portfolio concentration