Whitecap Resources Remains Highly Favored By Yield-Seeking Investors

| About: Whitecap Resources, (SPGYF)

Summary

Whitecap announced its proved + probable resources have grown by 27%.

Its capex for 2016 has been covered by a reversible disposition.

Its reduced dividend is still healthy (almost 7%).

The company anticipates a 2016 free cash flow surplus.

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

Whitecap's Growing Reserves

Whitecap Resources Inc. (OTC:SPGYF) is an intermediate energy producer that despite the current energy pricing has remained highly favored by Canadian yield-seeking investors. My last SA article on the company dealt with an announcement of both a reduction in its dividend and that its 2016 capex had been covered by a reversible disposition of some production facilities.

Recently, Whitecap announced that an independent review by McDaniels of its proved + probable (2P) reserves at 2015 year end showed a substantial 27% increase (about 77% oil and liquids; largely light oil). The increase in Whitecap's proved reserves was slightly higher, at 29%, or approximately 10% per share.

While the larger part of the total increase was generated by the company's acquisitions during the year, especially its purchase of Beaumont Energy, a hefty portion came from the re-evaluation of the potential of those assets the company had held previously. Excluding acquisitions, the latter increase alone amounted to a 122% replacement of Whitecap's annual production, which figure jumped to 499% if acquisitions were taken into account. Whitecap has now maintained a consistent record of significant reserve increases each year since 2010.

Click to enlarge

(Whitecap Resources company photo.)

Whitecap estimates that the total additional proved + probable reserves have increased its net present value by $3 billion or $13.61 per share (using a 10% discount). This is despite the 40% year-to-year decrease in McDaniels' strip pricing. (At US$45 for 2016 WTI, this may or may not be somewhat bullish, but perhaps not unduly.) The increased reserves were also calculated to have increased Whitecap's reserve life to a very healthy 18.7 years.

The company's figures also show that the finding, development and acquisitions capital deployed to acquire these new (2P) reserves amounted to $18.53 per boe. This figure includes future development capital. While the Beaumont acquisition was not a bargain basement one, it has clearly helped to secure a strong position for Whitecap going forward.

2016 Outlook

Whitecap estimates that, given the measures it has taken, it will have in 2016 some $38 million in free funds after capital spending and its dividend obligations. It will still have about $455 million of its credit facilities unused. The company's estimates reflect a US$37.50 yearly average price, at which price, given its hedges, it would have netbacks per barrel of about C$18.50. (With current January and February crude prices, it has probably realized $5-10 per barrel below this figure, but it should still show some profit.)

Although the current futures market is entirely unpredictable, Whitecap's assumptions are reasonably conservative. The company estimates the average differential of its mainly light oil to WTI at C$4.00 and AECO at C$2.50. Both its 2016 crude and its natural gas are partly (31% and 55% respectively) hedged at attractive prices, oil at 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.

At US$45 WTI, Whitecap's netbacks would obviously be higher; its free funds flow would increase to $133 million after paying capex and the current dividend, and its payout ratio would drop to some 69%.

Whitecap had announced earlier that as a result of its reduction of 2016 capital spending to just $70 million, the total number of wells it would drill during the year will now be 23. This is in sharp contrast with the 111 new wells the company presented as its typical yearly average in its February corporate presentation. (The company lists its total potential drilling locations at 3,111.)

The current expected 2016 production would be 37,000 boe/d (75% liquids) down from both the 41,100 boe/d the company had previously forecast and the record 40,953 boe/d average production it reported 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. It projects that the current decline rate might drop to about 14% by the end of this year, and to 12% by the end of 2017.

Click to enlarge

(Whitecap Resources company photo.)

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.

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 threshold. With its newly reduced dividend, and with average annual WTI pricing in the US$37.50 range the company is suggesting, its current payout ratio should be in the area of about 90%, which seems to be reasonable. (Whitecap has no DRIP.) The market reaction to its dividend reduction seems to have been very positive.

Analyst Coverage

Whitecap is well covered by Canadian institutional analysts. Only the most recent recommendations (since the recent 2016 guidance on January 19) appear in the table below. The target prices listed are for WCP in CAD on the TSE. As of the February 17 close, WCP stood at $7.06 (SPGYF at $4.66).

Date

Institution

Recommendation

Target Price

February 11

CIBC

Sector Outperformer

$13.00

February 11

Cormark

Top Pick

February 11

AltaCorp Capital

Buy

$10.25

February 4

Dundee Securities

$7.50

January 21

FirstEnergy Capital

Outperform

$13.75

January 20

National Bank Financial

Outperform

$11.00

January 20

Haywood Securities

Buy

$11.50

January 20

TD Securities

Action List Buy

$12.50

January 20

Barclays

Equal Weight

$6.00

January 20

RBC Capital

Outperform

$12.00

Click to enlarge

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.

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 considered 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

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 ̴ $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 its estimates do 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 income 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.