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Enerplus Likely To Miss Q4 Guidance On Weather And Nat Gas Prices

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Oil Boom Shifts The Landscape Of Rural North Dakota

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Enerplus (NYSE:ERF) is simply a coagulated E&P institution that chiefly operates successful Bakken. However, harsh wintertime upwind successful North Dakota, on pinch anemic earthy state prices that wounded its non-operated assets successful nan Marcellus group nan institution up for a miss successful Q4.

Company Profile

ERF was nan original Canadian lipid and state royalty trust. Today, it doesn't person immoderate Canadian assets, having divested nan remainder of them successful December to Surge Energy.

The E&P now operates successful 2 superior basins: nan Bakken and nan Marcellus.

Over two-thirds of ERF's accumulation comes for nan Bakken, wherever nan institution has complete a decade of halfway drilling inventory. The bulk of nan company's inventory is nan Little Knife and Fort Berthold Indian Reserve (FBIR) plays, some of which person WTI breakevens nether $40.

Production Mix

Company Presentation

The institution has over 550 drilling locations successful nan Bakken core, which has mostly been de-risked fixed nan activity successful nan area. This includes nan FBIR, arsenic good arsenic Northern Dunn County and eastbound Williams County. It besides has complete 100 locations successful nan extended halfway successful confederate Dunn county, wherever it tin get coagulated returns midcycle. Finally, it has astir 250 drilling locations that tin beryllium viable astatine higher lipid prices aliases pinch good costs improvements.

Of its halfway drilling inventory, astir 60% of its locations are successful nan FBIR, 25% successful nan Little Knife, and 15% successful eastbound Williams country. Its extended halfway locations are successful Murphy Creek.

In nan Marcellus, ERF has arsenic non-operating position successful nan barren state core. It has astir 32,700 nett acres pinch 160-170 MMCf/d of production.

The institution besides holds astir 34,7000 nett acres successful nan bluish hold of nan Wattenberg section successful nan DJ Basin successful Colorado.

Recent Asset Transactions

ERF has been engaged nan past 2 years tightening up its plus portfolio. It sold retired of its Canadian acreage position this twelvemonth successful 2 abstracted deals. On Halloween, it closed a woody trading its Alberta assets to Journey Energy for C$140 million. The assets included ERF's Ante Creek and Medicine Hat operations arsenic good arsenic immoderate different interests successful Alberta.

Then, successful December, nan institution exited Canada pinch nan aforementioned woody pinch Surge Energy. The E&P received astir C$245 cardinal successful nan transaction.

In 2021, ERF made some acquisitions and divestitures successful nan Bakken. In March, nan institution acquired Bruin for US$465 million. Bruin owned 151,000 nett acres successful nan Bakken and had accumulation of ~24,000 BOE. The woody was done astatine a 3x aggregate of Bruin's 2021 forecast EBITDA utilizing a US$50 per tube WTI lipid price. Then successful April, it acquired 77,800 nett acres successful Dunn County from Hess (HES) for US$312 million. The woody included 110 tier-one undrilled locations. The assets were producing 6,000 BOE per time astatine nan time.

Then later successful 2021, it divested its Sleeping Giant acreage successful Montana and Russian Creek acreage successful North Dakota for US$115 million.

Opportunities

ERF has done a bully occupation upgrading its plus portfolio done plus purchases and divestitures. The institution made immoderate shrewd acquisitions erstwhile lipid prices were low, and past was capable to divest its Canadian assets a twelvemonth later erstwhile prices were high.

From an operating standpoint, nan institution is almost a Bakken pureplay now. Its halfway positions successful nan FBIR and Little Knife, meanwhile, person immoderate of nan champion breakevens successful North America extracurricular nan Delaware.

Basin Breakevens

Company Presentation

Risks

Oil and earthy state prices coming nan biggest consequence to ERF. While lipid prices person held up well, nan aforesaid can't beryllium said for earthy state prices, which person seen a precipitous diminution from their 2022 highs. The institution had immoderate bully hedges successful spot for Q1 of 2023 astatine nan extremity of Q3, and a decent magnitude done October 2023. When looking astatine nan floor plan below, retrieve that conscionable nan Marcellus unsocial has nat state accumulation of 160-170 MMCf/d.

Hedges

Company Presentation

However, nan dream would beryllium that ERF locked successful much hedges earlier nan diminution successful nat state prices. If not, its non-operated Marcellus assets are going to spot a beautiful large diminution successful rate travel that gets worse passim nan year.

The institution besides is now very tied to nan Bakken and faces basin risk. The biggest consequence pinch nan Bakken is simply a takeaway risk, arsenic location are still challenges pinch nan Dakota Access Pipeline (DAPL) that could perchance unopen it down. This seems for illustration a agelong changeable now, but it's not retired of nan realm of possibility. If it did happen, though, companies should person to displacement to rail, and basin differentials would rustle out.

There is besides a very bully chance that ERF misses Q4 guidance owed to terrible wintertime upwind successful nan Bakken. Crestwood (CEQP) does nan gathering and processing for ERF successful nan FBIR, and it had to lower Q4 Bakken measurement guidance owed to nan harsh upwind conditions. This is conscionable a impermanent delay, but it will show up successful Q4 results. ERF raised its guidance successful early November conscionable up of nan terrible upwind successful nan region.

ERF Guidance

Company PR

Valuation

ERF trades astatine nether 4x nan 2023 EBITDA and 2024 EBITDA statement of $1.12 cardinal and $1.05 billion, respectively.

Trailing EV/EBITDA

Trailing EV/EBITDA (Finbox)

On a PE basis, it trades astatine 5x EPS estimates of $3.33. Based connected nan 2024 statement for EPS of $3.52, it trades astatine 4.8x.

Chord Energy (CHRD) is apt nan closest comparison, fixed that it's a Bakken axenic play. It trades astatine 2.5x 2023 EBITDA and a PE ratio of 5x.

Both ERF and CHRD person beardown equilibrium sheets.

Conclusion

While ERF has done a bully occupation upgrading its assets and turning its attraction to its halfway asset, harsh wintertime upwind successful nan Bakken and a immense diminution successful earthy state prices are apt to inhibit Q4 results. In nan mean term, earthy state prices are nan bigger interest if nan institution didn't enactment quickly to adhd further hedges. This is besides a non-operated, non-core plus that I would person liked to seen divested while nat state prices were high.

While nan banal appears attractively valued, it's successful statement pinch a adjacent that doesn't person nan aforesaid natural-gas value exposure. Its aggregate is besides beautiful overmuch successful statement pinch wherever it has traded historically successful caller years - moreover a spot higher.

As such, I deliberation this is simply a banal investors tin see shorting into a imaginable net miss.

This article was written by

Geoffrey Seiler floor plan picture

Former Senior Equity Analyst astatine $600M long-short hedge money Raging Capital.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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