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Msg  443224 of 467209  at  8/23/2022 8:07:14 PM  by

Under the Radar

The following message was updated on 8/23/2022 10:26:38 PM.

Enerplus (ERF) - model update, higher nat gas pricing assumptions drive CFFO…

Disclaimer: This is NOT financial advice. This is my own due diligence which I am sharing with this private board. It is up to you to decide how you want to invest your money. By reading further, you agree to conduct your own due diligence, and, also if you are inclined to do so, please share it as well for others on this board. I welcome comments, criticisms, and further suggestions to improve this report.

Disclosure: I own a significant position in ERF, currently holding a 4.0% portfolio weight position with ACB of C$17.00

Currency Note: All of the numbers below are in USD as company has switched over to reporting in American currency despite trading on both sides of the border.

I have raised my nat gas pricing assumptions for Enerplus (ERF) because they benefit from selling at Henry Hub marker from the Marcellus with only slight discounts. I am now using $6 for low case, $7 for base case, and $8 for high case per mcf going forward next twelve months starting in Q4-22.

They currently have about 40% of their nat gas hedged at about $4.00 but these hedges expire end of October. The only nat gas hedges they have on their books thereafter are calls against them at $16.41 per mcf with floors bought at $6.50.

Rolling valuation forward by a quarter to start Q4-22 improves balance sheet and cash flow dynamics as these hedges wind down. The value proposition has dramatically improved, consequently. I have net debt ending Q3-22 at about $420 M with annual free cash flows anywhere between $700 M to $1,020 M depending on commodities pricing. The balance sheet will have been completely repaired by end of 2022. The question then becomes, what do they spend their free cash flow on?

My free CF yield projections right now range between +22% (at $80 liquids and $6 gas) all the way up to +36% (at $100 liquids and $8 gas). They should easily be able to exhaust their 10% NCIB share buyback slowly and steadily sometime by end of next spring. But, there will be significant free cash flow left over above and beyond this amount needed for the NCIB and their current dividend, which is very modest at approximately 1%.

I think they ought to immediately double their dividend. They should also continue to chip away at their debt by paying down $50-75 M per quarter. Any amounts generated above and beyond this level ought to be set aside for future special dividends or even a possible Substantial Issuer Bid (SIB) to buyback between 5-10% of the outstanding stock via a Dutch tender auction or similar vehicle.

Enerplus is ridiculously cheap on any fundamentals valuation basis. It should be trading around US$25-30 a share a year from now. With the market malaise toward fossil fuels this is very unlikely. Consequently, all management can do is aggressively buy back their own stock while paying out higher sums in dividends (raising the regular plus paying out special divvies).

Brackets () denote negative values. All currency in CAD. Please note that I am using the DYNAMIC multiples for my personal target prices based on EV:CFFO multiples of 4.5x (low), 5x (base), and 5.5x (high) cases - all very realistic and conservative for a company with an exemplary asset base, solid balance sheet, and no CAPEX inflation exposure.

**Please note, that modelling energy commodity prices in the current environment (Russian invasion of Ukraine, immense inflation in numerous sectors worldwide, drawdowns of the US strategic petroleum reserve, etc. etc.) remains a difficult task to say the least. I have kept my liquids pricing assumptions relatively stable for now but have substantially raised my nat gas assumptions for the current year. No attempt to model a second year further out is justified at the present time because uncertainty is at extreme levels.

Model starts at Q4-22 and rolls four quarters forward….[again all numbers below are in USD]

Year 1_______________2022 (low)____2022 (base)____2022 (high)

WTI ($/bbl)__________$80___________$90___________$100
Nat gas ($/mcf)______$6.00__________$7.00_________$8.00
production (boe/d)____99,167________101,500________103,833
% nat gas____________39%___________39%__________39%

CF netbacks ($/bbl)___$32.00________$36.00________$40.00
CFFO ($M)___________1,158__________1,334_________1,516
CAPEX ($M)__________425___________450___________475
Dividend_____________46____________46_____________46 *(based on current $0.20 per annum, should rise)
Free CF ($M)_________+687__________+837__________+995

current net debt($M)___(420)_________(420)_________(420)
yr end net debt ($M)____+267_________+417__________+575
net debt : CFFO_________NIL__________NIL___________NIL

shares out (mm)_______231.1
share price _________US$15.50
Market Cap ($M)________3,582
Enterprise Value($M)_____3,315________3,165__________3,007

EV : CFFO_____________2.9x__________2.4x___________2.0x
Prior yr production_____94,450 boe/d
production growth (%)____+5%_________+7%__________+10%

Proved (1P) reserves ___________439 mmboe
1P RLI (in years)________12.1___________11.9___________11.6
EV:1P ($/boe)__________$7.55_________$7.20_________$6.85

Proved+Probable (2P) reserves __616 mmboe.
2P RLI (in years)________17.0___________16.6____________16.2
EV:2P ($/boe)__________$5.40________$5.15__________$4.90

Free CF yield__________+22.1%_______+28.0%________+34.6%
production Hedged(%)___17% (next four quarters)
12 month target*_______$23.70________$30.65_________$38.55
(based on 4.5x, 5x, and 5.5x EV:CFFO)
return to target (%)_____+54%________+99%__________+150%

Under the Radar

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