Decimated by oil prices, now it’s a waiting game…

Whitecap Resources Inc. is an oil-weighted growth company. It is a clean Canadian energy company focusing on the acquisition, development, and production of oil and natural gas assets in Western Canada.

The company has a low decline light oil asset base and 2,895 drilling locations in British Columbia, Alberta, and Saskatchewan. It is the active seller and shipper on six oil feeder pipelines connected to Enbridge mainline. Whitecap has a presence in West Central Alberta, Northwest Alberta and British Columbia, Southeast Saskatchewan, West Central Saskatchewan, and Southwest Saskatchewan.

Whitecap is the leading operator and majority owner of the largest Carbon Capture and Utilization Storage Project in the world.

Investment Data

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Revenue Growth & Market Exposure

Whitecap has a strong history of successful acquisitions. Most of its reservoirs are characterized by thick oil columns with significant oil in place per unit area and characterized by shallow declines and a predictable production base. The company’s premium assets allow for positive funds flow even in a low crude oil price environment. It has a robust drilling inventory with 3,390 pro forma locations for organic growth and value creation. Whitecap’s oil and natural gas leases have a fixed term which can be increased where certain minimum thresholds of production have been reached. The royalties from production on Crown lands are determined by provincial regulation and calculated as a percentage of gross production.

Q2 production stood at 70,807 boe/d almost at par with the last year’s level. The company brought back ~1,000 boe/d of the previously suspended production given the improving commodity prices and cost reduction initiatives. Whitecap stands a good chance to gain from its principal oil and natural gas properties under development. There are significant expansion opportunities to expand the Weyburn CO2 flood. The Kerrobert waterflood has a significant upside related to reserve recovery and decline stabilization. Here is the company’s average daily production data from its major areas for the last year:

Whitecap is in a good position to optimize and eliminate redundancies with more than 80% of asset overlap in the event of the business combination with NAL Resources. NAL has oil and gas operations in Alberta and Saskatchewan and is currently producing approximately 27,000 boe/d. The transaction will further consolidate assets in core areas and will be accretive on all key metrics. Whitecap is guiding FY2020 production of 65,000 – 67,000 boe/d.

Dividends

Whitecap’s portfolio of assets with stable production and low base declines provides shareholders with a predictable cash flow stream for monthly dividend payments. The company has continued to pay its dividend in good times as well as bad. But it has faced one of the toughest current periods given the falling commodity prices and Covid-19 crisis. As a result, Whitecap cut its dividends by 50% from $0.0285 to $0.01425 every month. It, however, increased its monthly dividend by 5% in 2018 and again by 5.6% in 2019. The company has a modest dividend yield of 1.7% and a high payout ratio. Whitecap is also buying back its shares at discounted prices. The company will purchase up to 20 million shares over a period of twelve months commencing on May 21, 2020. It is preserving cash by reducing capital expenditures and cutting costs.

Whitecap paid $17.4 million in dividends to shareholders. Its cash flow is more than sufficient to fund both its capital expenditure and dividend payments. Whitecap generated funds flow of ~$78 million in the second quarter. The company also realized $18 million of cost savings in the first half of the year and is anticipating an additional $32 million to be realized in the second half of the year.

Whitecap is well-positioned to gain from industry consolidation. The company has a sound track record of reducing costs on acquisitions. It is targeting a 7% reduction to NAL operating costs on the combination. Whitecap’s strategic combination with NAL Resources will further strengthen its financial position with the latter having no debt. Whitecap will issue 58.3 million shares in exchange for NAL shares, resulting in pro forma ownership of 12.5%. The transaction is expected to be completed by January 2021. The combination will further reduce FY 2021 Debt / EBITDA ratio by 25%.

Prudent capital allocation, strong balance sheet, and low decline light oil asset base support an internally funded business model.

Competition

Companies carrying on business in the crude oil and natural gas sector in Canada are subject to extensive government regulations and controls. The oil and gas industry is highly competitive at all levels. Whitecap competes with the likes of Arc Resources, PrairieSky Royalty, Enerplus Corp., Enerflex, Ovintiv, etc. A predictable and stable production base and large light oil development drilling inventory are Whitecap’s strong competitive advantages.

Bottom Line

Whitecap’s business is heavily dependent on the prices of oil and natural gas production which have largely fluctuated during recent times. Whitecap’s fully funded income growth model, base production guidance of 81,000 – 83,000 boe/d for FY 2021, and significant free funds flow should support future dividend streak.

The company is favorably placed to gain from an eventual crude oil supply and demand recovery. Whenever that is …