April 12, 2022
Enerplus Corporation
Advantaged Basin—Advantaged Position
Our view: Enerplus remains our favorite intermediate producer given its consistently solid execution, balance sheet strength and bolstered scale in North Dakota. We are reaffirming an Outperform rating on Enerplus and a one-year price target of $16 per share.
Key points:
Bakken Update. Enerplus Corporation’s April 12 Update on the Bakken explored its long runway of quality drilling locations in an advantaged basin and affirmed a solid corporate strategy. Despite the company’s bolstered scale in North Dakota via its two acquisitions last year, drilling inventory always seems to surface as a latent concern amongst institutional investors.
Enerplus pointed towards 670 drilling locations in its core/extended core areas of the Bakken—or about 13 years of drilling inventory at 50 wells per annum. The company estimates that all of the 670 wells would support 10% IRRs at or below $50 WTI. The 560 core locations would support 10% IRRs or greater in the low $40's WTI.
Constructive Egress Outlook. The egress picture also looks favorable for the Williston Basin with Bakken-WTI spreads expected to remain in the $0-$2 range for the foreseeable future. This reflects a confluence of basin production declines through the pandemic along with an increase in the Dakota Access Pipeline’s (DAPL) capacity to 750,000 bbl/d in 2021. On the natural gas front, Enerplus pegs sales gas rates from the Bakken at about 1.85 bcf/d versus 2.5 bcf/d of take-away capacity. The company has contracted/third-party DAPL capacity of 22,550 bbl/d sold into the US Gulf Coast.
Five-Year Plan Reaffirmed. There is no change in Enerplus’ five- year (2022-26) game plan which encompasses average annual liquids production growth of 3%-5% supported by $400-$450 million of capital investment (circa 80% directed towards the Bakken). This level of growth would maintain the company’s corporate decline rate at 30%-35%. Enerplus has boosted its mid-cycle WTI outlook from $55 to $60-$65 given a shifting global oil supply-demand balance. Elsewhere, the company’s Canada waterfloods disposition process (announced February 2) remains ongoing.
Shareholder Returns. Enerplus will continue to prioritize share repurchases alongside ongoing debt reduction with excess cash flow. The company is committed to fully executing its 2022 buyback by July 31 (pointing towards circa $150 million of repurchases in the first-half of 2022), and plans to renew its NCIB (10% of shares outstanding) in August.
Relative Valuation. Enerplus is trading at a 2022E debt-adjusted cash flow multiple of 2.7x (vs. our peer group avg. of 3.3x) and free cash flow yield of 27% (vs. our peer group avg. of 18%). 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 offset by portfolio concentration