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Enerplus Resources Fund (TSE:ERF)
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Enerplus acquires Bakken and Marcellus assets and sells oilsands lease
Canadian Business  Sep 22  Comment 
CALGARY - Enerplus Resources Fund (TSX:ERF.UN) said Tuesday it has bought several Bakken and Marcellus assets and sold its Kirby Oil Sands
Enerplus reports net profit of $31.3 million in second quarter, reversing year-earlier loss
Canadian Business  Aug 6  Comment 
CALGARY - Enerplus Resources Fund (TSX:ERF.UN), a Calgary company which operates in Canada and the United States, reports it earned $31.3 million
Quantum Energy Partners Names Garry Tanner as Managing Director and Head of Upstream Oil and Gas
Marketwire  May 10  Comment 
HOUSTON, TX -- (Marketwire) -- 05/10/10 -- Quantum Energy Partners, LLC (Quantum), a leading provider of private equity to the energy industry, is pleased to announce that Garry Tanner has joined as Managing Director. He will lead Quantum's strategy
Enerplus Announces Strategic Marcellus Shale Acquisition and Equity Financing
Marketwire  Aug 19  Comment 
CALGARY, ALBERTA -- (Marketwire) -- 08/19/09 -- Enerplus Resources Fund (TSX: ERF.UN)(NYSE: ERF) - The Trust Units offered will be issued by way of a short form prospectus to be filed with the securities regulatory authorities in each of the




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Enerplus Resources Fund (NYSE: ERF) is a North American onshore oil and gas drilling and exploration company with 440,234 MBoe in proved and probable reserves. Because 46% of the reserves are natural gas, 37% are crude oil, and the rest are a mix of bitumen and LNG , the company has profited from the rise in oil prices and the growing preference of natural gas over coal for electricity.[1] Oil and natural gas are commodities and so all goods are sold at or near the market price. Oil futures and natural gas prices hit an all time high in July 3rd 2008.[2][3]


Enerplus has attempted to defy a trend in the oil exploration business of shrinking onshore reserves by acquiring 5 companies with substantial reserves since 2005, resulting in a 16% increase in net reserves. [4] Alberta, where the majority of Enerplus' activity takes place, has adopted a new tax law which goes into law in 2009 that increases royalties companies pay on oil development. The new statutes threaten the profits of Enerplus. [1] Enerplus has also invested in oil sands which are large tracts of oil saturated sand. These sands make up the second largest oil reserves after Saudi Arabia.

Business Overview

2007 Regional Breakdown of Production by BOE
2007 Regional Breakdown of Production by BOE [1]
2007 Breakdown of Proved and Probable Reserves
2007 Breakdown of Proved and Probable Reserves [5]

Enerplus is Canadian based, and the majority of its reserves are in Canada. It has five main regions: Alberta (73% of production)[6], Montana (14% of production)[6], Saskatchewan (8% of production)[6], British Columbia (3% of production)[6], and Manitoba (2% of production).[6]

The company also extracts its fossil fuels through 5 specific play types:

Contents

  • Crude Oil Waterfloods (20% production, 23% reserves)[7]: For this play, water is injected into the existing reserve to supplement the pressure and to provide a substance to allow additional oil to travel to the well.[7] The water must be separated and discarded.[7] Enerplus expects to spend $105 million[7] to further develop this program in 2008. This process is used mostly in British Columbia, Alberta, Saskatchewan and Manitoba.[7]
  • Shallow Natural Gas and Coalbed Methane (18% production, 21% reserves):[8] Shallow natural gas consists of tightly packed sandstone usually less than 800 meters in depth.[8] Enerplus had lowered its spending on these plays in previous years due to low prices, but it expects to re-enter this segment in 2008. These plays are restricted to Alberta and Saskatchewan.[8]
  • Bakken Oil (13% production, 9% reserves):[9] The only Bakken Oil play and Enerplus' single largest producing property[9], Sleeping Giant LLC in Montana[9], was acquired in 2005[9]. Enerplus has completed several refracs on the wells in the region to increase production levels[9]. A refrac is when a well is re-fractured to improve the surface area and pressure within the well.[9]
  • Deep Tight Natural Gas (11% production, 7% reserves): Enerplus completed a $14 million project[10] which added 3.5 million Boe[10] of deep tight natural gas reserves. The acquisition of Focus Energy Trust in 2007[10] is expected to be Enerplus' largest deep tight natural gas reserve[10], producing approximately 6,000 Boe/d.[10] These reserves are situated in British Columbia and Alberta.[10]
  • Oil Sands (15% reserves): The oil sands are not producing as of December 2007[11], but Enerplus considers it to be its long term development project to ensure future production[11]. This project is further described below.[11]
  • Other Conventional Oil and Gas Assets (38% production, 25% of reserves): Along with all the other specific oil plays, Enerplus owns a substantial number of ordinary oil and gas wells[12] throughout all 5 geographic locations[12]. Enerplus plans on spending $20 million[12] on improving and optimizing these conventional wells in 2008[12].[12]


Like many onshore companies in the oil and gas drilling and exploration sector, the company's oil and natural gas reserves have shrunk[13] over the years. It was been able to reverse this trend in 2007 by following an aggressive acquisition strategy. Enerplus acquired 5 companies in 3 years[13], and enlarged both its total proved and probable undeveloped reserves in 2007 and 2006.[13] However, despite these efforts, only 10% of Enerplus' proved reserves are undeveloped.[1] This means that it is at or near maximum production levels.

Operating Income and Revenue from 2005 to 2007
Operating Income and Revenue from 2005 to 2007[14][15]


Because of the nature of the oil and gas industry, a company usually encounters the majority of its costs while it establishes and drills[16] the wells necessary for extraction. Once the wells are in place, revenue rises increasingly as more wells are built and more oil and gas are extracted. However, Enerplus has already developed the great majority of its reserves[16], and so its revenue has not increased[16] over the past few years. Enerplus' average production rate has fallen from 85,779 Boe/d in 2006 to 82,319 Boe/d in 2007.[16][17] This drop explains the fall in revenue from 2006 to 2007 despite a rise in gas and oil prices.

Trends and Forces

High gas and oil prices yield high profits

On July 3rd, 2008, crude oil futures reached a record high of $145.85.[2] In 2000, the oil price per barrel was $20, but in 2007, it averaged $72.[18][19] The global demand for oil and gas has risen dramatically as China, India and other emerging markets require more energy to power their industrializing economies.[20] However, the supply of fossil fuels has not kept up with the skyrocketing demand and speculation that the world has passed peak oil are prevalent. The result is that the profit margins on oil and gas drilling and exploration have risen.[21]

Natural gas favored over coal for its cleanliness in American power-plants

The fear of climate change has negatively impacted the coal industry. Coal releases nearly twice as much carbon dioxide and more than 5 times as much carbon monoxide as natural gas for the same amount of energy output. Natural gas also releases less sulfur dioxides and nitrogen oxides than coal when burned for electricity.[22] Citigroup (C), J P Morgan Chase (JPM), and Morgan Stanley (MS) said in early 2008 that they will be unlikely to invest in coal burning power-plants. However, the demand for electricity grows annually by 2% and so utility executives have announced the construction of more generators powered by natural gas. North American natural gas production per person reached its peak in 1971 and the rise in demand will result in continued elevated prices.[23] The rise in prices will raise the value and the profit margins of the 46% of Enerplus' proved reserves which are natural gas.[1]

Enerplus must acquire new reserves to maintain its strength

Like much of the industry, Enerplus has already heavily developed the majority of its lands and has ever shrinking on shore reserves.[24] To rectify this problem, Enerplus acquired Lyco Energy Corporation in 2006, a private American company, for $501.9 million. The purchase gave the company access to 120,000 undeveloped acres. The region has a 92% light oil 8% natural gas mix. Enerplus also purchased TriLoch Resources Inc and Sleeping Giant LLC in 2005, and Kirby (KEX) and Focus Energy Trust in 2007. The TriLoch addition solidifies Enerplus' position in southern Alberta and gives it access to new NGL (Liquid Natural Gas), and the Sleeping Giant move gives Enerplus access to a very productive well.[4] Kirby (KEX) gives the company access to new, larger oil sands and Focus Energy provides 84,744 MBoe (thousand barrels of oil equivalent) of mostly natural gas reserves. These acquisitions have caused Enerplus' net reserves to rise from 379,693 MBoe in 2005 to 440,234 MBoe in 2007.[25][26] These acquisitions are necessary because Enerplus must acquire new reserves in order to defy the trend of ever shrinking onshore deposits.

Alberta's new royalty regime threatens Enerplus' profits

In 2007, the government of Alberta released a new royalty regime on oil, natural gas, and bitumen. The new regime will go into effect January 1, 2009 and will alter the royalty rates. Rates on conventional oil range up to 50%, natural gas is set at 40%, and butanes and propane are set at 30%.[27] The region has the highest number of Enerplus' oil and natural gas wells both producing and non-producing.[28] 73% of Enerplus' production comes from Alberta and the majority of its undeveloped acres are in the Province.[29]

Enerplus is developing in oil sands, the possible future for North American oil

Oil Sands are large tracts of dirt that are saturated with oil. After being processed, the oil can be separated from the dirt and refined like normal oil. The regions of Alberta, Canada and Venezuela are particularly rich in this form of oil. There are approximately 175 billion barrels of proven oil reserves, with the possibility of more buried deeper. This makes Alberta home to the second largest oil reserve after Saudi Arabia.[30] Enerplus' Kirby acquisition and its Joslyn project are both based on this new form of oil extraction. Estimates as of 2007 predict that Kirby's oil sands will provide 244,374 million barrels of bitumen, while the Joslyn project will provide 306 million barrels of bitumen. Both of these projects are in development, but Enerplus' predicts production levels of 10,000 bbls/d by 2013.[31] Enerplus has already spent $39 million and intends to spend $50 million more on developing the oil sands. Extraction of oil from the dirt is only profitable as long as oil prices remain high. These regions in Alberta have not been used in the past since prices were not high enough. If prices fall in the future, the oil sands will once again become unprofitable.[32]

The rise in U.S. Environmental Legislation and hybrid and alternative energy will hurt the industry in the long run

The US Energy Independence and Security Act established a 35mpg average for automakers and set a standard of 36 billion gallons of renewable biofuels by 2022.[33] Renewable and alternative energy such as nuclear, solar, wind, biofuels, and ethanol have grown both in consumer demand and production levels. Concerns about environmental issues such as global climate change and excess pollution have also resulted in a decreased demand for oil and gas, thanks to the adoption of cars like Toyota's Prius. 24 US states have also adopted Renewable Energy Standards.[34]

Competition

Enerplus is a land based oil and gas company. Unlike many of its competitors, it avoids the high costs of deepwater and the the ultra-deepwater oil and gas drilling and exploration, and it does not have to worry about poor weather. Hurricanes Rita and Katrina caused damage to 113 oil rigs in the Gulf of Mexico alone.[35] The downside of staying on land however, is the price of the physical drilling grounds tends to be more expensive. On top of that, North American onshore drilling sites have become less numerous and less productive. As a whole, onshore drilling is on the decline in North America.

There are many companies within the oil and gas exploration and production sector, but the following companies are most similar to Enerplus for a variety of reasons.

  • Encana (ECA): is an onshore Canadian oil and gas company like Enerplus. It also has invested substantially in oil sand holdings in Alberta. Encana has 927 million barrels in reserves, which is only slightly more than Enerplus.[36]
  • Atlas Energy Resources, LLC (ATN): is a North American drilling company which is also strictly onshore. Atlas Energy encounters almost only natural gas, and so it has benefited from the growing preference of natural gas over coal.[37]
  • Arena Resources (ARD): is also a uniquely North American onshore drilling company. Like Enerplus, it encounters a more balanced level of crude and natural gas. Arena's production levels are also smaller than Enerplus'[38]
  • Compton Petroleum (CMZ): is a Canadian based onshore company which specializes in shallow and deep & tight gas plays. The company has also invested in a few different oil sands in Canada. Compton is smaller than Enerplus however, and it has not moved into the US.[39]
Total Production Between Competitors
Enerplus EnCana Atlas Energy Arena Compton
Crude Oil (Bbl/d) 34,506[16] 130,498[40] 422[41] 3,606[42] 2,579[43]
NGL (Bbl/d) 4,104[16] 24,207[40] N/A N/A 2,239[43]
Natural Gas (Mcf/d) 262,200[16] 3,367,400[40] 86,893[41] 4,119[42] 167,000[43]

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References

  1. ↑ 1.0 1.1 1.2 1.3 1.4 ERF 40-F 2008 "Summary of Aggregate Enerplus Reserves" p. 27
  2. ↑ 2.0 2.1 VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
  3. ↑ Mining and Exploration "Natural Gas Price Extended Record High"
  4. ↑ 4.0 4.1 ERF 40-F 2008 "Developments in the Past Three Years" p. 3
  5. ↑ ERF 40-F 2008 "Description of Principal Properties and Operations" p. 8
  6. ↑ 6.0 6.1 6.2 6.3 6.4 ERF 40-F 2006 " Developments in the Past Three Years" p. 3
  7. ↑ 7.0 7.1 7.2 7.3 7.4 ERF 40-F 2008 "Crude Oil Waterfloods" p. 11-12
  8. ↑ 8.0 8.1 8.2 ERF 40-F 2008 "Shallow Natural Gas and Coalbed Methane" p. 12-13
  9. ↑ 9.0 9.1 9.2 9.3 9.4 9.5 ERF 40-F 2008 "Bakken Oil" p. 13-14
  10. ↑ 10.0 10.1 10.2 10.3 10.4 10.5 ERF 40-F 2008 "Deep Tight Natural Gas" p. 15
  11. ↑ 11.0 11.1 11.2 ERF 40-F 2008 "Oil Sands" p. 16
  12. ↑ 12.0 12.1 12.2 12.3 12.4 ERF 40-F 2008 "Other Conventional Oil and Gas Assets" p. 20
  13. ↑ 13.0 13.1 13.2 ERF 40-F 2008 "Undeveloped Reserves" p. 45
  14. ↑ ERF 40-F 2007 "CONSOLIDATED STATEMENTS OF INCOME" p. 5
  15. ↑ ERF 40-F 2008 "CONSOLIDATED STATEMENTS OF INCOME" p. 5
  16. ↑ 16.0 16.1 16.2 16.3 16.4 16.5 16.6 ERF 40-F 2007 "Quarterly Production History" p. 40
  17. ↑ ERF 40-F 2008 "Quarterly Production History" p. 21
  18. ↑ zFacts: "Crude Oil Prices Drive up Cost of U.S. Addiction"
  19. ↑ EIA: "Short-Term Energy Outlook"
  20. ↑ DO 10-K 2006, "Delving into the Deep", p.12
  21. ↑ Rigzone: Day Rates
  22. ↑ Natural Gas and the Environment: "Fossil Fuel Emission Levels"
  23. ↑ New York Times: Business "Utilities Turn From Coal to Gas, Raising Risk of Price Increase"
  24. ↑ ERF 40-F 2008 "Risk Factors" p. 75
  25. ↑ ERF 40-F 2008 Appendix G "Combined Oil and Natural Gas Reserves of Enerplus and Focus" p.G2
  26. ↑ ERF 40-F 2008 "Developments in the Past Three Years" p. 3
  27. ↑ ERF 40-F 2008 "Province of Alberta" p. 68
  28. ↑ ERF 40-F 2008 "Oil and Natural Gas Wells and Unproved Properties" p. 11
  29. ↑ ERF 40-F 2008 "Summary of Principal Production Locations" p.9
  30. ↑ CBS News: "The Oil Sands Of Alberta
  31. ↑ ERF 40-F 2008 "Oil Sands" p.16-19
  32. ↑ ERF 40-F 2008 "Kirby Project" p.15-17
  33. ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
  34. ↑ New York Times: Science "Solar Energy"
  35. ↑ Tech IMO: "Offshore Drilling: Fact Vs. Fiction"
  36. ↑ Google Finance Encana (ECA)
  37. ↑ ATN 10-K 2008 Item 6 "Selected Financial Data" p.40
  38. ↑ ARD 10-K 2008 Item 1 "General" p.4
  39. ↑ New York Times Business: "Compton Petroleum Corporation"
  40. ↑ 40.0 40.1 40.2 ECA, 40-F for 2007, consolidation financial statements, page 4
  41. ↑ 41.0 41.1 ATN 10-K 2008 Item 7 "Results of Operation" p.47
  42. ↑ 42.0 42.1 ARD 10-K 2008 Item 2 "Production History" p.19
  43. ↑ 43.0 43.1 43.2 CMZ 40-F 2008 "GROSS NATURAL GAS AND LIQUIDS PRODUCTION"
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