Among the stocks we recommended as best buys over the second half of 2014 was Enerplus Corporation (TSX─ERF; NYSE─ERF). Unfortunately, this stock was one of the worst performers on our Income Trust Guide since then, thanks to the collapse of oil prices. Obviously, had we known that oil prices were going to fall as far as they have back then, we would have refrained from making Enerplus a best buy. (This former income trust converted to a corporation in 2011.)
Nonetheless, we continued to see value in the shares of Enerplus as they declined from about $26 in August to $18 in our December 5, 2014, issue. Lately they’ve been in the $10 to $12 range. Despite this, we still see some attraction in the shares. For one thing, they seem undervalued to us, both on relative and absolute bases. Currently, they trade at about three-and-a-half times their estimated cash-flow-per-share for 2015. We consider anything under five times a bargain. What’s more, the company’s closest peers currently trade at an average of five-and-a half times 2015 cash-flow-per-share.
Of course, these estimates will be subject to change according to movements in the price of oil. And if prices continue to tumble and stay low, these estimates may prove to be too optimistic.
But one thing is clear right now: oil, trading at around $48 for a barrel of West Texas Intermediate, cannot remain below $70 for long. Generally, below the $70-level, U.S. shale production becomes unprofitable. So a sustained period of low oil prices will likely cause a reduction in supply. And that, in turn, should result in a better balance between supply and demand — with the price settling around, say, $70.
Resurgence in oil prices, of course, would likely lead to a recovery in the oil and gas patch, with share prices likely making strong recoveries. Such a scenario cannot possibly be timed — though many commentators have been quick to attach a time frame to a potential recovery.
Our advice, therefore, is to maintain a balanced approach to investment, and to buy gradually. We see strong, long-term recovery potential in the shares of Enerplus. With a solid balance sheet, and part of its production hedged at higher prices, we think the company will likely survive this energy downturn and do very well when things turn around.
As for Enerplus’ dividend, it now yields about nine to 10 per cent. This is typically a sign the market thinks a dividend cut is in the offing. And the market may prove to be right. But, in our view, there has been over-reaction and panic on the part of investors. For now, Enerplus has kept the dividend in place, and we don’t expect it to be cut. But even if it is cut, the shares would still likely have an attractive yield. We view Enerplus as a buy if you can accept higher risk in return for what may prove to be very attractive long-term total returns.
Money Reporter, MPL Communications Inc.
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