Buy, Sell, or Hold: Enerplus

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Enerplus (NYS: ERF) today, and see why you might want to buy, sell, or hold it.

Enerplus is a Canada-based oil and gas exploration and development company with a market capitalization near $3 billion. Its stock is down about 50% over the past year.

One factor that draws many to this stock is its hefty dividend, as it recently yielded 7.6%. (Interestingly, Enerplus is among the minority of dividend payers that make their payouts monthly rather than quarterly.) The company is a Canadian trust with a primary mission of paying out a lot of cash to shareholders and some tax breaks accompanying that mission. The Canadian government is phasing out those tax breaks, though, which has adversely affected the bottom line of many companies.

Its operations have some appeal, too. It has assets in Canada's oil sands, as well as in the Bakken and Marcellus shale fields in the U.S. These are promising regions.

If you put faith in Wall Street analysts, there's good news, as well, with the stock receiving two upgrades recently, and from outfits with reasonably strong records. Even some Fool analysts are bullish, with Joel South, for example, recently citing Enerplus as a company with an improved balance sheet and "great land" assets, and one making a "good move" in conserving cash (albeit by way of cutting its dividend) for use in a move to more profitable oil and natural gas liquids production. Other energy companies, such as SandRidge Energy (NYS: SD) , are also shifting their focus more to oil, seeking higher profit margins. In its just-reported second quarter, Enerplus noted that oil and liquids now make up 49% of its production volume.

The company's second-quarter results also offer promise, with production levels up nearly 9% over year-ago levels and hundreds of millions of dollars being spent on additional exploration and development.

Remember that hefty dividend? Well, it's not perfect. Enerplus cut its payout in half recently, with the drop due largely to very low prices for natural gas these days. Add in the fact that its current payout level is several times bigger than its earnings and its free cash flow has been negative, and you've got a recipe for further dividend reduction. (Remember, too, that if many investors are mainly hanging around for the dividend, a cut may send them running for the doors, depressing the price further.)

Note, though, that Enerplus isn't alone in the sector in having reduced its dividend and potentially cutting it again in the future. Pengrowth Energy (NYS: PGH) recently cut its dividend by more than 40%, and some worry that others, such as Pembina Pipeline (NYS: PBA) and Penn West (NYS: PWE) , will also have to do some trimming. Both recently had payout ratios well above 100%, and Penn West is hoping to raise about $1 billion by selling assets.

Note also that Enerplus may very well not decrease its dividend any further. Management recently announced a stock purchase plan that will permit shareholders to receive dividends in the form of additional shares instead of cash (thus conserving company cash), and the company is bolstering its coffers in other ways: "We continue to progress on our plans for the partial sale and/or monetization of a portion of our early stage asset portfolio which includes the Duvernay, Montney and operated Marcellus."

Meanwhile, though, Enerplus' long-term debt is sizable and has grown in recent years, and its cash level is negligible. Its annual revenue rate is below 2007 and 2008 levels. The company's share count has been inching up, too, which can dilute the value of all shares.

The stock's valuation isn't a screaming buy, either, with its P/E ratio recently above 50 and rapid revenue or earnings growth not expected soon. Pengrowth Energy's P/E has been around 30, while SandRidge Energy's recent P/E was just 4.

Hold (off)
Given the reasons to buy or sell Enerplus, it's not unreasonable to decide to just hold off on it. You might want to wait for an even lower entry price, for example, or for the energy industry to start firing on more cylinders, perhaps with natural gas prices rising. You might also want to see the company free-cash-flow positive and posting a string of profits.

The verdict
I'm holding off on Enerplus for now, but everyone's investment calculations are different. Do your own digging and see what you think. Enerplus may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

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