Enerplus Corporation

Enerplus Corporation (TSX: ERF) produces and develops crude oil and natural gas assets across Canada and the United States. The company has its oil production units at the Williston and Waterfloods basins, while the Marcellus provides a significant portion of natural gas production.

To weather the current slow-down, the company reduced its capital budgeting by 45% to CAD 300 million and revised its cost structure through operational efficiency, reductions in the vendor service cost and lowering compensation for its Board of Directors, executives and employees. The Group declared a monthly dividend of CAD 0.01 per share, payable on May 28, 2020.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, ERF posted a significantly higher revenue of CAD 359.46 million, as compared to CAD 202.58 million in the previous corresponding period. The increase was aided by a significant gain from commodity derivative instruments amounting to CAD 131.34 million against a loss of CAD 84.86 million in pcp. The Group reported lower revenue from Oil and natural gas sales, net of royalties, despite an 11% y-o-y increase in total production. The price realization fell significantly, primarily attributable to an overall lower demand within the industry. Net Income stood considerably lower at CAD 2.87 million as compared to CAD 19.15 million in Q1FY19 due to a higher depletion & depreciation expense along with a significant surge in operating and transportation expenses. Adjusted fund flow reduced to CAD 113.2 million as compared to CAD 168.8 million in the first quarter of FY19. Production during the first quarter stood at 98,209 BOE per day, including liquids of 54,390 barrels per day, reflecting a growth of 11% from Q1FY19 and a decline of 9% on q-o-q basis.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: ERF’s stock corrected ~57% so far this year and currently trading near the lower band of its 52-weeks trading range of CAD 1.62 and CAD 11.16. The group has a strong balance sheet and ample liquidity of CAD 142.1 million in cash balance and USD 600 million in the bank credit facility, which seems sufficient to sail through the current economic cycle. The group has maintained low financial leverage as its net debt to adjusted funds flow standing at 0.8x. The group has a solid hedging position and expects hedging gain of CAD 150 million in 2020. The group has achieved an 11% reduction in well costs in North Dakota. The group is expecting a lower run-rate cost driven by workflow improvement and the implementation of other cost control measures. The stock was trading above its 20-days and 50-days Simple moving average (SMA) of CAD 3.59 and CAD 2.91, respectively, which indicates a short-term bullish trend. The group has reduced its production owing to the lower demand scenario; however, it has the flexibility to adjust the production in accordance with market demand. An expected recovery in demand for oil on account of easing in lockdown restrictions is likely to impact the group’s performance positively. The stock made a pull-back and moved ~29% in the last month, outperforming the index by ~23%. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Apache Corp, Crescent Point Energy Corp and Seven Generations Energy Ltd. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 3.93 on May 26, 2020.    

ERF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Tidewater Midstream and Infrastructure Ltd.

Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) operates in natural gas processing, NGL extraction, gas storage, crude oil and NGL terminalling infrastructure, refining operations and marketing to end-use markets through transmission pipelines, trucking and rail systems. The operations are in three core areas in the Western Canadian Sedimentary Basin (Deep Basin, Montney and Edmonton) as well as in central British Columbia.

During the first quarter of FY20, the Group paid a total dividend of CAD 3.37 million, with a payout ratio of 27%, higher than Q1FY19 (~20%).

Guidance: For FY20, the Company expects Adjusted EBITDA to range from CAD 175 million to CAD 185 million. Net debt to Adjusted EBITDA is expected at 3.0x to 3.5x.

Q1FY20 Financial Highlights: TWM declared its quarterly results, wherein the Company reported its revenue at CAD 252.46 million, reflecting a robust growth of 104% on y-o-y basis. The stellar growth was driven by additional contribution from its recent acquisition of Prince George Refinery followed by the commissioning of the Pipestone Gas Plant and increased NGL and crude oil marketing activity. During the quarter, the Company’s net gas processing and extraction stood 16.3% higher than Q1FY19 at 465 MMcf/day. Operating income was reported at CAD 12.26 million compared to an operating loss of CAD 3.93 million in pcp. The operating expense also increased on account of the acquisition along with increased marketing cost of sales related to crude oil, driven by increased marketing activity.  The Company reported a higher net loss of CAD 40.01 million, as compared to a net loss of CAD 7.60 million in pcp. The slump in the profitability was due to a significant higher finance cost, followed by an unrealized loss on derivative contracts. The Company exited the quarter with a cash balance of CAD 4.7 million, while total assets were reported at CAD 2,043.26 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The Stock of TWM corrected ~51% in the last one year, due to sharp correction in the oil and gas prices on account of lower demand environment. Despite the volatility in commodity prices, the group’s assets act as natural hedges in various price moment scenario. Gas storage and extraction segment tend to perform well in low gas price environments, while during the medium to high price environments, the gas gathering, and processing segment have an advantage. TWM also indulges into liquids blending, where the Company has an improved product-pricing and is benefited through blending products of lower value into higher-value products. Further, the Company has trucking and rail logistics infrastructure and is well placed to serve the NGL and crude oil markets. The group is going to benefit from its recent acquisition and the commencing of the new plant. The group’s recent acquisition, PGR, is in a unique position to benefit from low crude oil prices with significant crude oil storage and its feedstock costs significantly reduced with the decline in WTI prices. The stock is offering a lucrative dividend of 5.33% (though inflated owing to price correction). In the recent past, the stock of TWM made a pull-back rally and soared ~42% in the last one month, outperforming the index by ~35%. On a price to Cash flow basis, the stock is available at 2.3x on TTM, as compared to the industry median (Natural Gas Utilities) 7.9x. Hence, we recommend a ‘Speculative Buy’ on the stock at the current market price of CAD 0.71 on May 26, 2020.

TWM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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