Plus Signs for This Driller

02/04/2013 8:30 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

If you’re willing to take a little risk for a very healthy dividend, Gordon Pape of The Canada Report recommends this oil and gas producer.

Established in 1986, Enerplus (ERF) is a former income trust. Based in Calgary, it is a diversified oil and gas producer. Average daily production in the third quarter was 81,573 barrels of oil equivalent (boe), almost half of which was oil and natural gas liquids.

Enerplus converted to corporate status with the imposition of the new tax on Canadian trusts at the start of 2011. It now trades as a regular common stock with listings on the Toronto and New York stock exchanges.

There are two good reasons to like Enerplus. The first is yield. At the current payment rate of 9 cents per month, or $1.08 annually (figures in Canadian dollars), the shares yield 8.4%. The second is the company's exposure to some of the most exciting oil plays on the continent.

Enerplus owns Bakken crude oil assets in Fort Berthold, North Dakota. It increased production from this region during the third quarter of 2012 by 10%, to approximately 12,800 boe/day. In November, production increased again to 14,000 boe/day. Enerplus also has holdings in the Sleeping Giant area of the Elm Coulee field in Montana, which it plans to increase in 2013.

The company reported funds flow of just under $135 million in the third quarter of 2012, up 9.5% from the corresponding period in 2011. For the first nine months of the fiscal year, funds flow was $444.2 million, a gain of 6.5% year-over-year.

However, Enerplus reported a net loss of $63.5 million for the quarter. This was due to an
impairment of $114 million in the company's exploration and evaluation (E&E) assets, the majority of which related to leases in West Virginia and Maryland, which will expire over the next 12 months.

The weakness in the company's portfolio is its large natural gas position. Continued low prices have resulted in a decline in gas production and a reduction in capital expenditures. As already noted, Enerplus plans to abandon some of its gas leases in the eastern US next year. It will retain its position in the Marcellus formation in Pennsylvania, which the company believes is one of the best areas within the play.

The stock has been very volatile and is currently trading at less than half its 2012 high of $26.94, reached in early January. The company cut its dividend by 50% in mid-year, which accelerated the sell-off in the shares. They fell as low as $11.53 in November but have since rebounded.

Enerplus currently pays monthly dividends of 9 cents a share. However, these are not guaranteed and could change at any time. For US residents, the monthly payments are taxed at the applicable dividend rate. There is also a 15% withholding tax, which can be claimed as a foreign tax credit. Shares held in an IRA are not subject to the withholding tax.

Enerplus shares are suitable for investors who are willing to accept a high level of risk in exchange for an 8.4% yield and potential capital appreciation. The shares trade actively in New York, and any broker can acquire them for you.

There is high risk here but if an 8.4% yield and capital gains potential fits with the risky side of your portfolio, it's worth the gamble. Buy.

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