Sergei Dubrovskii
Investment Thesis
Whitecap Resources (OTCPK:SPGYF) has outperformed many oil & natural gas producers over the last 3 or 5 years, but the stock has lagged slightly over the last year, even if it has started to recover some over the last few months.
I wrote my last article on the stock here on Seeking Alpha in September of 2022, which I would recommend reading for a more detailed overview of the company.
Data by YCharts
Figure 1 – Source: YCharts
If I were to speculate on the underperformance over the last year, it was likely due to the XTO Energy Canada acquisition, which was in my view very accretive to the company. The acquisition provided impressive per share growth in funds flow, free cash flow, and production numbers. However, it did delay the higher shareholder distributions by a few quarters.
Now that the company has integrated XTO Energy Canada, and recently disposed of some non-core assets, we are likely only months from reaching the net debt target, from which point 75% of FCF will be distributed to shareholders. That is likely to provide a nice tailwind for the stock price.
Return of Capital
Whitecap pays a healthy monthly base dividend, which has now in January 2023 been raised to C$0.0483 per month. That equates to an annual dividend yield of 5.2% using the latest share price.
The company has continuously been doing buybacks as well, while much of the free cash flow has recently been used to pay back a portion of the debt that was used in the XTO acquisition.
The net debt was in Q3-22 at C$2.2B, but due to the disposal of the non-core assets mentioned above, which will upon closing bring in about C$400M in cash. The transaction is expected to close in Q1-23. Together with good cash flows since Q3-22, we should just be a few hundred million Canadian Dollars above the C$1.3B net debt target. Unless something unexpected happens with energy prices to the downside, we are likely to see that target reached in Q2-23.
Figure 2 – Source: Whitecap January 2023 Presentation
Once the net debt target of C$1.3B is achieved, the company will likely raise the base dividend again to C$0.73 per year, which equates to a dividend yield of 6.6% using the latest share price. However, more importantly than the base dividend increase, the company has committed to returning 75% of FCF to shareholders at that point, which I have a hard time not seeing being very positive for the share price.
Growth & Value
One of the main reasons for the long-term share price appreciation for Whitecap is in my view the long-life assets and the ability to sustainably grow production over time. We are talking about production per share growth as well, which is not always the case in the industry.
The below chart illustrates the production growth over the last few years, with guidance for 2022 and 2023 included. Also, do keep in mind that the latest share count is from Q3-22, which will go down from buybacks. So, the production per share in 2023 is likely to be slightly above the number seen in the graph.
Figure 3 – Source: Koyfin, Quarterly Reports, & Company Presentation
While Whitecap has shown to be an excellent growth company and pays a healthy dividend, it also trades at an attractive valuation. The below chart uses the latest share price, a C$1.5B estimate for the net debt, and the company’s free cash flow projections for 2023 using various WTI Crude Oil prices.
Here we can see that the company trades with FCF Yield in the 13-15% range using the latest WTI Crude Oil price, depending on whether we focus on the market cap or enterprise value. I would once again emphasize that both the share count and the net det level will decrease throughout 2023, so the FCF yields will increase some if the oil price is unchanged.
Figure 4 – Source: Company FCF estimates with My Assumptions
Conclusion
It is hard not to like a company like Whitecap, which has managed to grow production per share, and reward shareholders with a reasonably large dividend and buybacks. The balance sheet is also relatively good and improving further.
There are no doubt companies with much more extreme valuations in the industry, but Whitecap is an excellent combination of growth, quality, and a relatively attractive valuation. The higher shareholder distribution is also a positive catalyst for the share price in 2023.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.