DBRS Confirms Enerplus Resources Fund at STA-5 (high)

DBRS has today confirmed the stability rating of Enerplus Resources Fund (Enerplus or the Fund) at STA-5 (high), reflecting the Fund’s very strong financial profile despite lower commodity prices, its relatively low production cost structure and the upside potential associated with its oil sands leases. The Fund has made a strategic decision to pursue steam-assisted gravity drainage (SAGD) oil sands projects for medium- to long-term growth from long-life unconventional assets such as Kirby, rather than mining assets (Joslyn), which were sold in 2008. It has also made approximately $2.1 billion in acquisitions in the past two years, primarily the acquisition of Focus Energy Trust (Focus) in 2007 through a share exchange (for approximately $1.7 billion), and the Marcellus shale gas purchase (Marcellus) in September 2009 partly funded by equity, which have enhanced its asset base. Reserve replacement costs have increased significantly in recent years, although these should decrease over time as reserves from early life assets recently acquired are recognized.

DBRS has upgraded the Financial Profile as one of the key factors for assessing the stability rating to Superior from Moderate, given the Trust’s consistently conservative financial profile and its recent strategic move to a sustainable business model to fund capex and distributions with internal cash flow.

In September 2009, Enerplus closed the Marcellus purchase to acquire an average 21.5% non-operated working interest in approximately 540,000 gross acres (116,000 net acres) for US$411 million, US$164.4 million in cash and $246.6 million as a carry of 50% of future drilling and completion costs over the next four years. The transaction was funded by $225 million of equity issuance. The seller, Chief Oil & Gas LLC, continues to operate the assets, including the midstream infrastructure in the area. DBRS views the acquisition positively as it adds future growth potential with good economics to its asset base with contingent resources of approximately 1.4 Tcfe to the Fund. Enerplus expects gross production growth of 100 mmcf/day net to the Fund in the next five years.

With the equity offering mentioned above, the Fund will continue to maintain its conservative financial profile with debt-to-capital of approximately 11.8%, the lowest amongst its peers, and debt-to-cash flow of 0.79 times at September 30, 2009 (9M 2009), which sets it apart from its peers. To conserve cash, the Fund decreased per unit monthly distributions three times from $0.47 to $0.38 (November 2008) to $0.25 (December 2008) and to $0.18 (January 2009), reducing its payout ratio to approximately 55% of operating cash flow during the LTM 9M 2009 (50% for 9M 2009), which is at the low end of management’s guidance range of 50% to 75%. Over the longer term, DBRS expects Enerplus to fund cash distributions and capex with internally generated cash flow, which is consistent with its strategic move to a more sustainable business model. The Fund’s policy is to hedge production up to a maximum of 80% of forecast production for the coming year, net after royalties. For the remainder of 2009, the Fund has downside protection for approximately 28% of its crude oil at $98.22 per barrel and 18% of its natural gas production hedged at an effective price of $8.12/mcf. In 2010, approximately 31% of its crude oil is downside protected at $75.87 per barrel and 17% of its natural gas production hedged at an effective price of $6.80/mcf.

The Fund maintains sufficient liquidity through a three-year extendible $1.4 billion bank facility (undrawn at September 30, 2009) to November 2010 at Enermark Inc. (a wholly owned subsidiary) which is expected to be extended before maturity. To enhance its debt maturity profile, in June 2009, the Fund issued approximately $325 million (equivalent) of senior notes in three tranches through a private placement. About $225 million (70% of total) of these notes are due in 2021 and repayable from 2017.

The Fund benefits from its well-diversified production base, with above-average reserve life of 8.8 years providing considerable inventory for development. The reserve life should also be helped by the additional reserves from the Marcellus acquisition (8 bcf of proved plus probable reserves). The Fund retains high operatorship (about 70%) in its properties. During 2008, Enerplus successfully sold its 15% working interest in Joslyn to Occidental Petroleum Corporation for $500 million to rebalance its portfolio and enhance its financial flexibility. The Fund remains the sole owner and operator of the Kirby Oil Sands Partnership (Kirby), a SAGD project in Alberta purchased in 2007, although the project has been deferred. Should Kirby proceed, the project is expected to provide substantial growth opportunities based on long-life unconventional assets and is expected to mitigate in part the depleting conventional reserves which result in the Weak ratings for Operating Characteristics and Asset Quality.

2009 gross production is expected to average about 91,000 barrels of oil equivalent per day (boe/d) with an exit rate of 88,000 boe/d based on capex of $330 million. At 9M 2009, Enerplus was a 60% gas-weighted operation which introduces more volatility in the near term, given the recent low natural gas price environment, though DBRS expects natural gas prices to recover over time.

The Fund expects to convert to a dividend paying corporation in late 2010. Its substantial tax pools should help shelter its taxes payable until 2013/2014 based on current commodity prices. It also has approximately $9 billion of safe-harbour growth capacity under the government’s “normal growth” guidelines associated with Bill C-52, which should adequately support the Fund’s growth profile as a specified investment flow-through (SIFT) to the end of 2010.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.

This is a Corporate rating.