With West Texas Intermediate plunging to its lowest price since early 2010, there has been a frenzied sell-off of Canadian energy companies. This has driven the share price of Enerplus Corp. (TSX: ERF)(NYSE: ERF) down 30% this year, leaving it with some very attractive valuation multiples in conjunction with an impressive 6.9% dividend yield.
This makes Enerplus a deep-value investment opportunity for the patient contrarian investor.
Let me explain why.
Appears attractively priced
Enerplus is currently trading with an enterprise value, or EV, of a mere five times EBITDA and 13 times its oil reserves, making it attractively priced in comparison to many of its peers. This makes it appear cheaper than Crescent Point Energy Inc. (TSX: CPG)(NYSE: CPG), which has an EV of eight times EBITDA and 27 times oil reserves. It is also cheaper than Baytex Energy Corp. (TSX: BTE)(NYSE: BTE), which has an EV of 10 times EBITDA and 28 times its oil reserves.
With a $50,000 price per flowing barrel (a measure of an oil company’s equity value per barrel of crude produced), Enerplus appears exceptionally cheap. This is significantly lower than either Crescent Point’s $145,000 per barrel or Baytex’s $162,000.
When these attractive valuation multiples are considered in conjunction with Enerplus’ quality assets and growing crude production, it is clear the company is undervalued.
Holds a portfolio of high quality oil assets
Enerplus holds a portfolio of high-quality oil and gas assets located in the lower-risk jurisdictions of Canada and the U.S. with 406 million barrels of oil reserves. These reserves are 51% weighted to crude and other liquids and have a net present value after tax of $3.9 billion, or $18.70 per share. This represents a premium of 28% over Enerplus’ current share price, highlighting just how undervalued the company is at this time.
While crude prices have continued to plunge — now at their lowest point in four years — the price of natural gas has recovered, more than doubling from the 10-year low it hit in April 2012. This, coupled with Enerplus’ growing crude and natural gas production, will help boost earnings and margins, while compensating for weaker crude prices.
How good is that dividend?
Enerplus continues to pay one of the highest dividend yields among major producers in the patch, with a monster yield of 6.9%. This is marginally lower than Crescent Point’s 7.6% and Baytex’s 8.4%, but still higher than many of its peers.
There are concerns the dividend is under threat because Enerplus’ payout ratio is more than double its net income, and softer crude prices will likely further impact operating margins. However, I do not believe the standard means of calculating a dividend payout ratio using net income is an accurate assessment of the sustainability of Enerplus’ dividend.
This is because there are a number of non-cash items included when calculating net income. I believe operating cash flow provides a far more accurate picture because it represents the cash generated by Enerplus through its underlying operations.
When substituting cash flow in place of net income, the payout ratio falls to a very sustainable 30%. Even after deducting production-sustaining capital expenditures, there is only a slight shortfall, which Enerplus is primarily funding through increased debt.
But with net debt of less than two times operating cash flow, Enerplus is not heavily leveraged, leaving it able to increase debt as required. It also has an undrawn credit facility totaling $707 million. In conjunction with operating cash flow, this will provide sufficient funds to cover dividend payments, capital expenditures and its working capital deficiency.
Clearly, Enerplus is attractively priced, trading at a discount to its oil assets, and a range of other very attractive valuation multiples. This, in conjunction with its high asset quality and growing crude production, should help to take share prices higher when oil prices rebound over the longer term.
