An Energy Pick at the Turning Point

03/08/2013 7:45 am EST


Oil is flowing, and so is cash at this driller that appears to have overcome earlier problems and is now a buy, writes Geoffrey Seiler of

Canadian energy producer Enerplus (ERF) hasn't had a really good quarter in quite a while, but its recently reported fourth-quarter results could very well be the turning point for the company.

 The firm generated cash flow from operations of $199.7 million, or $1.01 per unit in the fourth quarter, which was up from $156.7 million, or 87 cents per unit, a year ago.

Based on current forward prices, Enerplus expects fund flows to grow by 8%. Looking at the company's balance sheet, its debt-to-funds-flow ratio was 1.7 times.

This was actually a very strong quarter for Enerplus, with the Canadian energy producer beating on most metrics. Funds flows easily surpassed the $172 million consensus, while production surpassed the 84.4 million barrels of oil equivalent per day analyst view.

This was a stark difference to the company's third-quarter report, when problems with drilling and tie-in activities in the Marcellus Shale (in the Appalachian basin) negatively impacted its results.

The company's balance sheet has improved markedly over the past year, and operating costs were drastically cut. Enerplus’ capital expenditure-adjusted payout ratio, meanwhile, is now comparatively conservative, making the company’s dividend look very stable. It also has solid oil hedges in place for this year.

With the stock trading at a discount to peers and well below its net asset value, we think Enerplus could finally be set up for a rally. We rate the stock, which currently has a dividend yield of about 8.7%, a "Buy."

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