Whitecap Resources' Latest Acquisition Boosts Production

| About: Whitecap Resources, (SPGYF)

Summary

Whitecap recently increased its working interest at Boundary Lake and raised its 2016 production guidance.

Its bought deal share issue readily sold out.

Its dividend is healthy (5.3%).

The company anticipates a 2016 free cash flow surplus at $37-38 WTI.

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

An Acquisition and a Bought Deal

Whitecap Resources Inc. (OTC:SPGYF) is an intermediate energy producer that despite the current energy pricing has remained a "go to" stock for Canadian yield-seeking investors. In a recent SA article on the company, I noted the very positive 2015 reserves report on February 10 (a 27% P+P increase). Since then, the company has issued two further reports that shed more light on its proposed 2016 operations. Obviously expected was the company's Q4 and 2015 earnings report on March 2, which also provided an update on its 2016 plans.

Prior to that, however, on February 23, Whitecap had issued a press release announcing the consolidation of its interests at Boundary Lake, effectively an acquisition, and a $95 million bought deal equity issue to finance the purchase. Interestingly, this release only recently appeared on its website, although the announcement of the closing of the bought deal on March 15 was already there. Also unusual was the fact that the Boundary Lake acquisition announced in the February release actually took place in late December, and the increased reserves were included in Whitecap's year-end reserves report without mention, however, of the acquisition. Notwithstanding the curious sequence of announcements, they represent a very positive thrust.

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Whitecap Resources company photo.

Boundary Lake / Higher 2016 Production

Whitecap first acquired a 75% interest in its Boundary Lake acreage in British Columbia from Imperial Oil in early 2014 for $855 million. This then gave the company 1,150 boe/d production of low decline light oil. Whitecap was obviously pleased by the results of its drilling and exploration programs. It increased its Boundary Lake holdings in Q3/15, and in December it acquired an added stake for $93.5 million. This raised Whitecap's working interest to 90%, giving it an additional 1,700 boe/d of production and 29 added net drilling locations. The cost per flowing boe/d was an attractive $54,900. The property has been under conventional waterflood since 1965 and the decline rate there has been maintained at less than 5% over the past 30 years.

Whitecap actually drilled 3 new wells at Boundary Lake prior to the 2015 year end, and early results from these exceeded expectations. In the present quarter, it has drilled two more wells; these are still being completed. All-inclusive well costs there are estimated at $2.2 million each. Boundary Lake now produces some 4,600 boe/d for Whitecap and has a drilling inventory of over 100 possibilities (net).

With the Boundary Lake acquisition, Whitecap was able to raise its production guidance for 2016 from 37,000 boe/d to 38,800 boe/d (75% liquids), while guidance for capital expenses stayed at the previously announced $70 million for the year. The production estimate is in fact quite conservative, since Q4/15 production was 42,067 boe/d. With the Boundary Lake wells, current production is likely even higher. The latest corporate presentation estimates an excellent 18% overall decline rate for 2016 that with the latest acquisition could fall even further.

The Bought Deal Arrangement

Whitecap financed its recent purchase with a bought-deal share issue through several Canadian financial institutions involving the issue of 13,770,000 shares at $6.90 per share. There was no over-allotment provision. Although the issue price was only slightly below the previous closing price, the issue was fully subscribed. The press release noted that "Members of the Whitecap Board of Directors, management team and employees are expected to participate in the financing," and indications are that the shares sold very well. Whitecap announced closing of the bought deal on March 15. The additional shares issued will cost the company just over $5 million in extra dividend payments for 2016 (about $6.2 million annualized).

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Whitecap Resources company photo.

2016 Outlook

Given the recent revisions to its guidance, Whitecap estimates that in 2016 it will have 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$37.65 yearly average WTI price and an AECO price of C$2.00, at which prices, given its hedges, it should have funds flow of $253 million, and netbacks per barrel of roughly C$16.50.

Although the futures market is entirely unpredictable, Whitecap's assumptions are reasonably cautious. (The current rest-of-the-year average for WTI is about $43.) The company estimates the average differential to WTI at C$4.00. Both its 2016 crude and its natural gas are partly (33% and 55% respectively) hedged at attractive prices, oil at C$75.09 and gas at about C$2.68. Whitecap assumes a CAD at US$0.72, although this would rise with higher crude pricing.

At US$45 WTI, Whitecap's netbacks would obviously be even higher ($20.35 est.); its free funds flow should then come to $70 million after paying capex and the current dividend.

Dividend Sustainability?

Whitecap had attempted to maintain its dividend without any cuts, but it had always been clear that it wished to keep its payout ratio below 100%. With its new reduced dividend, and with average annual prices in the $37.65 range the company is suggesting, its current payout ratio should be in the high 90% range, which seems reasonable under the circumstances. (Whitecap has no DRIP.)

Whitecap can probably keep the payout ratio at just about 100% with average WTI for the year as low as US$35.00. Although a total dividend cut or a more drastic reduction have been suggested by some, with the current dividend at a moderate 5%, the market clearly is not of the same mind. A total cut would obviously severely challenge the share price by excluding trusts, institutional investors, funds and ETFs that depend on yield, and since WCP operates on a dividend-paying model, a severe reduction could have similar effects. Its bank lines currently allow reasonable leeway to finance acquisitions.

Some Comparisons

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For purposes of comparison in terms of relative torque to WTI pricing, the table above shows increases in share price over the past month in an increasing crude pricing situation (February 18 to March 18). The companies shown are various Canadian dividend-payers that are non-integrated intermediate producers with a high oil exposure. The price comparisons are for company shares on the TSE. The leader is Cardinal Energy (4.5% yield) with a 44% increase, followed by TORC (3.2%). Whitecap (5.3%), Crescent Point (1.9%) and Northern Blizzard (11.1%) are clustered in the 20% growth range. One of the safest dividends of all in the current environment is Vermilion Energy (6.3%; see my SA article), but that moved least (16%) with the crude price increases.

Analyst Coverage

Whitecap is well covered by Canadian institutional analysts. The most recent recommendations (since the January guidance) appear in the table below. The target prices are for WCP in C$ on the TSE. As of the March 18 close, WCP stood at $8.52 (SPGYF at $6.51).

Date

Institution

Recommendation

Target Price

March 16

TD Securities

Action List Buy

$12.00

March 16

Scotiabank

Outperform

$12.00

March 15

FirstEnergy Capital

Outperform

$9.75

March 4

Barclays

Equal Weight

$7.00

February 11

CIBC

Sector Outperformer

$13.00

February 11

Cormark Securities

Top Pick

February 11

AltaCorp Capital

$10.25

February 4

Dundee Securities

$7.50

January 20

National Bank Financial

Outperform

$11.00

January 20

Haywood Securities

Buy

$11.50

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.

For U.S. investors there are risks to share price and yield from any decline in the Canadian dollar. In Whitecap's case, since commodity prices are realized in USD and most company expenses are in CAD, a low Canadian dollar can actually be of some benefit. Moreover, the CAD is often considered a "petrodollar," and its current slide is largely attributable to the economic damage from low oil prices. Any rebound in crude pricing would 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 to ̴ $45 by H2/16. 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 anticipate average 2016 prices in at least the high $30s.

Among Canadian energy producers, Whitecap seems well poised to survive the current volatility, with low debt, a relatively sustainable dividend, stable production of light oil, low decline rates, significant hedging, better than average netbacks, good cash flow and a strong resource base.

Current crude pricing is volatile, and despite recent increases, pullbacks are possible, perhaps even probable. A share price dip on any decline in oil pricing may offer a buying opportunity, especially since smaller producers have been hurt disproportionately and not necessarily on fundamentals.

With gradually higher and more stable crude pricing, Whitecap's share price should continue to increase as investors re-entering the oil and gas sector seek sound value plays. Since Whitecap has been something of a safe haven among the intermediates, however, its share price may not climb at the same rate as some of its peers who have been hurt more.

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/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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