Enerplus: Beaten down buy

Looking to dip a toe in the beaten-down energy sector, we're going to add one of the hardest hit stocks: former Canadian trust Enerplus (ERF).

The company's balance sheet remains in good shape, with a debt-to-funds-flow ratio of 1.6x. It pays an annual dividend of $2.16 per share, good for a yield of about 14.7%.

Enerplus has assets in some of the hottest plays in North America, including the Bakken, Marcellus Shale, and Viking. Liquids (oil and NGLs) are expected to be half of its production by the end of 2012, and 70% of its CapEx is going towards liquids plays, with about 40% aimed at Fort Berthold in the Bakken.

The company reported its Q1 results earlier this month. It generated fund flows of $162.7 million, or 86 cents per unit, (figures in Canadian dollars unless noted otherwise), which was up from $161.2 million, or 90 cents per unit, a year ago, when it had less shares.

The company paid out 65% of cash flow to unitholders through its 18-cent monthly distribution.
Given the pounding the stock has taken, it might be surprising to some investors that Enerplus' fund flows per share actually came in much higher than the 69-cent consensus.

Production came right in line, with the outperformance coming from slightly lower costs and higher-than-expected oil price realizations.

That said, the company's huge CapEx-adjusted payout ratio and low natural gas prices continue to be a weight around the stock's neck. Management maintained the dividend, but wasn't as steadfast about maintaining it at current levels on the conference call as it has been in the past.

Planned non-core asset dispositions ($250-$500 million) as well as the new Stock Dividend Program should help maintain its solid balance sheet in the near-to-medium term. The company said it would feel more confident about its dividend with natural gas around $3.50CDN.

Barring a surge in natural gas prices, though, it seems like something will eventually have to give: either the CapEx spending, the dividend, or both. At this point, cutting the dividend could be good for the stock, since the specter of a dividend cut appears to be haunting it.

All in all, Enerplus has become a bloodied and battered stock. While a lot of energy names have been hurt recently, Enerplus has been one of the hardest hit.

With the stock trading near the depths of what it fell to during the height of the Great Recession, we'd start nibbling at it despite expecting a dividend cut.

We're going to start the stock with a "Buy" rating and $20 price target, and if natural gas prices can rally and its CapEx program can help it turn the corner and ramp up organic growth, then we think the stock could go much higher from these levels.

However, at this point this is bottom fishing, and investors need to be ready for a potentially bumpy ride and to look to dollar cost average into the name if need be.



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