Whitecap Resources Reduces Dividend, Cuts And Covers Capex

| About: Whitecap Resources, (SPGYF)

Summary

Whitecap recently announced the reduction in its dividend to C$0.0375 monthly (currently 6.46%).

It also announced a major cut in 2016 capex, from $150 million guidance to $70 million.

It is fully covering capex by a disposition of some production facilities.

The company anticipates a free cash flow surplus, even after covering capital spending and the dividend.

Note: Whitecap reports in CAD; unless otherwise indicated, prices are in that currency.

Whitecap's Recent Announcement

Whitecap Resources Inc. (OTC:SPGYF) is an intermediate energy producer that has been a favorite among Canadian dividend payers. On Jan. 19, a release from the company announced a 40% reduction to its current monthly dividend and a second cutback of its estimated 2016 capital expenses to just $70 million. This amount would be fully covered by a reversible disposition of product facilities to a third-party. With lower capex, 2016 production will be reduced by approximately 8%.

An earlier article on Whitecap had noted that the company had guided for a reduction in 2016 capital expenses to $150 million, down from $205 million in 2015. It noted that the company maintained the flexibility to reduce this amount further. The article had noted, however, that while Whitecap was then "comfortable" with its dividend, it was open to dividend reduction if low WTI pricing pushed its payout ratio over 100%. In response to oil prices at US$30 or less, Whitecap is now taking far more radical steps.

Capex and Production Cuts

Whitecap is now proposing 2016 capital expenditures of only $70 million, down from the $150 million it had estimated earlier. It said that:

reducing our capital spending in this environment will maximize the long-term value for our shareholders as we continue to focus on return on capital employed.

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Source: Whitecap company photo.

As a result of the capital reductions, the number of well to be drilled for the year will now be 23, as compared with the 88 wells previously guided. Of these, 15 would be in the Viking play, 5 in the Cardium, 2 in the Deep Basin and 1 in Boundary Lake. All are light-oil plays. The resultant production would now be 37,000 boe/d (75% liquids) down from the 41,100 boe/d previously forecast and the 40,800 boe/d average production for 2015. Whitecap maintains that its waterflood techniques and its extremely low decline rates (currently about 20%, but constantly being lowered) provide for sustained production at these levels without large capital requirements.

Facilities Disposition

Interestingly, Whitecap is totally funding its $70 million capex by the disposition of certain production facilities to an unnamed third-party. Whitecap will still keep operatorship of these facilities and will retain any third-party revenues generated by them. In turn, it will pay to the buyer an annual tariff for the duration of the arrangement. It will also retain the option to re-purchase these facilities at any time. This is obviously an arrangement that is beneficial to Whitecap, for while it will be responsible for the tariffs incurred, it will actually be in a position in 2016 to reduce its debt (and its interest) from 2015 year-end levels. The company estimates that the costs of the arrangement will be totally offset by its financial advantages.

Trimming the Dividend

Whitecap had previously maintained its dividend without any cuts, but it had always been clear that it wished to keep its payout ratio below 100%. Its previous guidance would have seen its payout just at that level. Now, beginning with the February dividend (payable on March 15) it will reduce its monthly dividend by about 40%, to C$0.0375 per share ($0.45 annually; currently some 6.5 %). This will result in an annual cash savings of about $91 million and a new payout ratio of about 85%. (Whitecap has no DRIP.)

Whitecap estimates that with the measures it has taken it will now have in 2016 some $38 million in free funds after capital spending and its dividend obligations. It will still have about $455 million (some 40%) of its credit facilities unused.

The company's estimates are based on US$30 WTI for Q1/16, $35 in Q2, $40 in Q3, and $45 in Q4 (a $37.50 yearly average). Although the current futures market is entirely unpredictable, these are conservative figures. The company estimates the average differential to WTI at C$4.00 and AECO at C$2.50. In fact, both its 2016 crude and its natural gas are partly (31% and 55% respectively) hedged at attractive prices. (Oil hedges average around C$85.00 and gas at about C$3.60.) Whitecap assumes a CAD at US$0.70, although this would rise slightly with higher crude pricing.

Whitecap calculates that these measures, taken together, will protect its balance sheet and yet keep the company positioned for sustained production and greater profitability in an improving price situation. Certainly, the measures continue to reflect the company's conservative and proactive stance, and seem to locate it well for at least the coming year.

Analyst Coverage

Whitecap is well covered by Canadian institutional analysts. Only the most recent recommendations (since the recent guidance on January 19) appear in the table below. The target prices are for WCP in C$ on the TSE. As of the January 25 close, WCP stood at $6.97 (SPGYF at $5.14).

Date

Institution

Recommendation

Target Price

January 21

FirstEnergy Capital

Outperform

$13.75

January 21

Dundee Securities

$9.75

January 21

AltaCorp Capital

Buy

$12.00

January 20

National Bank Financial

Outperform

$11.00

January 20

Haywood Securities

Buy

$11.50

January 20

CIBC

Sector Outperformer

$13.00

January 20

TD Securities

Action List Buy

$12.50

January 20

Barclays

Equal Weight

$6.00

January 20

RBC Capital

Outperform

$12.00

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Risks

Obviously, the greatest risk to any oil and gas producer would come from a further major decline in energy prices or sustained prices near current levels. For companies like Whitecap engaged in tight oil plays, there are always risks from decline rates that are higher than anticipated. Since Whitecap has a large part of its holdings in Alberta, there is some risk to its valuation from the royalty review there due to report shortly.

For U.S. investors, there are risks to share price and yield from any further decline in the Canadian dollar. At the same time, since commodity prices are realized in USD and most of the company's expenses are in CAD, a low Canadian dollar can actually be of benefit. Moreover, the CAD is often regarded as a "petrodollar," and its current slide is largely attributable to the economic damage from low oil prices. A rebound in crude pricing would almost certainly strengthen the currency.

Investment Thesis

At this time, any current investor in energy shares, or any prospective buyer, should probably be of the view that WTI crude prices will have improved meaningfully (to perhaps approximately $45) by the second half of 2016. Refineries coming on stream again after winter maintenance and the run-up to the summer driving season during April and May should trigger some improvement in pricing from current levels. If this is not the case, many oil producers could experience unanticipated problems, since few have targeted sustained pricing in the $30s. Here Whitecap is more conservative than most, but it does envision pricing increases as the year progresses.

Among Canadian energy producers, Whitecap seems well poised to survive the current volatility, with low debt, a relatively sustainable dividend, stable production, significant hedging, better than average netbacks, good cash flow and a strong resource base. The current measures have reinforced its strong position.

While the share price may still dip on any further fall in oil pricing, present prices may offer a good buying opportunity, especially since smaller producers have been hurt disproportionately and not necessarily on fundamentals.

Barring a further major drop in oil prices, Whitecap's share price should gradually increase as investors re-entering the energy sector seek sound value plays.

Whitecap's record since its transition to a dividend-paying model, its insistence on a less than 100% payout ratio, its fiscal discipline, and its increasing resource base, should make it attractive in the longer term, especially to yield seekers.

The company has had a good history of acquisitions and development. In the present climate, future acquisitions are likely, and the company has the resources to do this. At the same time, a desirable acquisition may possibly take precedence over the dividend.

For those who might consider investing, purchasing Whitecap shares on the TSE may be preferable because of the greater liquidity there.

Disclaimer: The information provided above is not a recommendation to buy or sell a stock. It intends to increase investor awareness and to assist investors to make smarter decisions. Prospective investors should always do their own further research, and take into account their own current financial holdings, their risk levels and their shorter or longer-term outlooks.

Disclosure: I am/we are long SPGYF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.