If you have read our blog for any time Enerplus, symbol ERF, is a stock you know. This Canadian oil producer continues to make us money and has been in our portfolio from the start. We did take a capital loss in it last year at year end to clear the slate and start over at a lower options price, but even with that we have made a good bit of money on this security. My favorite oil analyst McDep had a update on ERF this weekend and it leads us to believe there is significant value in the shares now. Thus we now suggest you outright purchase of this stock in your portfolio.
ERF has been in business a long time producing oil and gas in the Canadian territories where oil is abundant. The last few years the company operated under the trust structure there until the government had enough of companies using the trust idea to evade taxes. Last year ERF converted to corporate status with one exception, they kept the monthly dividend payout. Keeping the monthly payout just makes owning this stock so much sweeter and makes selling options on it sweet as well.
What also makes this stock sweet is all the sweet light oil it is producing from it's wells in Canada and now from it's oil plays in the Bakken region in North Dakota. Add in that at current price the dividend yield is above 9%. The dividend to cash flow payout is at 57% and the debt load is fairly low at about 21% of market capitalization. Maybe I am missing something but it seems to me the company is well set to continue to pay good dividends for awhile to come.
So why the sell off from the low 30's to now the low 20's? There are several reasons. One it that most people still have the opinion that ERF is the majority natural gas company it used to be, but not anymore, as it is now 74% oil and 26% gas so the exposure is much less. Understand natural gas is now so plentiful in North American that the price is about 20% of the same BTU value of oil pricing and many drillers are now burning off gas at the wellhead to get rid of it when drilling for oil. There is also the concern that the Obama administration's anti-business and anti-oil approach is going to hurt ERF and other Canadian oil producers. That might be true short term, but after Obama decided against the Keystone Pipeline the Canadians have begun doing what they said they would do and only last week inked a contract to sell certain oil products to China. The funny point about this Chinese buying North American oil is some of the Bakken region oil in North Dakota will now end up used in China as well due to the pipeline rejection, we expect no one has mentioned that to you. The last reason is the overhang of an equity offering at $23.45 per share that just closed Feb. 8 that has kept shares held down.
ERF offers the opportunity to be exposed to the oil patch with a dividend yield basically matched by no oil company currently being traded. Owning shares here also keeps you away from any concerns about what Obama will do to hurt your oil investment as the Canadians has announced publicly it is full speed ahead on taking advantage of their oil resources. But the most important plus about ERF is the now low price to value ratio of the stock. ERF closed Friday at $23.45 per share and anywhere in here below $24 per share is an excellent buy. The beauty of buying stocks that have sold off is you get a chance to buy in at what should be near a bottom, so even if the stock stays where it is you get a 9% dividend and paid to wait for the market to produce a fairer value in price. Of course with any security that has sold off there remains the risk of insider info being there that maybe someone knows that has caused the price point.
One caveat about buying ERF is to watch the ex-dividend date that occurs monthly around the 6th or 8th of the month to avoid buying before the date and getting hit with the extra value in the stock prior to ex dividend. Also Canada takes out a 15% investment tax from those residing in the United States so your 18 cent per share monthly payout is reduced by the tax and it is also adjusted somewhat for the currency exchange ratio. The 15% tax can be recovered when you file your taxes here in the US. Nice touch that you get to pay taxes in Canada and keep it out of Obama's coffers.
We own options on ERF and it is one of our largest holdings. We plan on expanding those holdings sometime later this month.
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