Whitecap Resources: Making Waves

Summary

• Earnings in the latest quarter were C$.16 per share and funds flow was C$.33 per share diluted.  Not bad for a C$9 stock and much better than the competition.
• Oil production grew 43% in the first quarter when compared to the previous year and is running about 14% ahead of the fourth quarter.
• Funds flow is usually more than half of revenue, even in the wretched first quarter of 2016, when the company managed a small profit.
• Projects with a rate of return of 200% assure growth in surprisingly hostile conditions.
• Management usually keeps the long term debt-to-funds flow under 2:1.

Whitecap Resources (OTCPK:SPGYF) is one of very few energy companies that managed to post a profit and decent cash flow in the first quarter of 2016. Now management is increasing production at a fairly rapid rate. A company with that kind of track record may be a little safer investment than the average oil and gas company. This company still pays a dividend which provides another source of return.

(Canadian Dollars Unless Otherwise Stated)

Source: Whitecap Resources Management Discussion and Analysis First Quarter Fiscal Year 2017

Like most companies, management endured the ceiling cost analysis effects in fiscal year 2015. Unlike most companies, this company made money in the first quarter of 2016 when commodity prices were rock bottom and much of the industry suffered. In the fourth quarter of 2016, profits were aided by a reversal of some of the impairment charges. This company is a Canadian company so reversal of the cost ceiling charges is allowed if the calculations permit it.

Interestingly, management has held long term debt relatively steady since 2015. This management operates with a working capital deficit. All cash goes against the bank loan at all times, so no cash is shown on the balance sheet. For those not used to this practice, some balance sheet ratios are distorted when there is no cash balance.

However, a quick review of the quarterly cash flow shows a relatively conservative long term debt to cash flow ratio. Management has a goal to keep that ratio under 2:1. This establishes a cushion. Should the low prices of the first quarter of 2016 persist, the company still could have paid its debts and done some operational activities. So this company is financially strong despite the weird (Working capital? Quick?) ratios due to no cash balance.

As it was, in the second quarter of 2016, the company sold some properties at a loss and made a major acquisition paid for with a concurrent stock sale. The usual culprits may have produced a loss but it's hard to tell when a fair amount of one-time events are involved. Production received an immediate boost from the acquisition and then management immediately began maximizing efficiency of the new acquisition. It is no surprise that production is up nearly 30% from the 2016 first quarter. Plus the new acquisition emphasized light oil, which receives a premium price. This will enhance profitability by increasing the percentage of light oil produced.

Funds flow stays at or above 50% of sales. Even in the miserable first quarter of 2016 had a very healthy funds flow percentage. Now the profit percentage is roughly 25% of sales in the first quarter. The emphasis of light oil production could send that figure climbing.

(Canadian Dollars Unless Otherwise Stated)

Source: Whitecap Resources, July, 2017, Presentation.

Despite the company having a fair amount of EOR projects, this company has some remarkably low costs. Many projects are very viable at WTI $35 and lower. Not many companies can make that boast. So if commodity prices decline, then this company simply emphasizes different projects. Production can still grow at considerably lower commodity pricing.

Compare this to operator Denbury Resources (DNR), which is struggling at current commodity prices. Denbury has yet to have the cash for its capital budget, let alone to be able to budget growth. Plus Denbury has several times the debt level of this operator.

Then there are companies such as Chesapeake Energy (CHK) that will not grow production much with the current capital budget. Plus Chesapeake had large losses every quarter in 2016 compared with the profits shown above. Comparisons like this show why Chesapeake has a hard time making money. Companies like Whitecap thrive at these low prices and will literally be printing money at higher commodity pricing. Whitecap can profitably expand production now. So enough companies in the situation of Whitecap will keep a lid on commodity pricing.

Source: Whitecap Resources, July, 2017, Presentation.

This Western Canadian operator has years of low cost places to drill. The Viking is the most profitable, and so will have the most budgeted wells. However, the acquisition was made in Southwest Saskatchewan, so that area will receive extra attention as the acquisition becomes properly integrated and profitability maximized. The costs in the acquisition are currently running higher than the company average, but management has plans to decrease those costs.

The growth plans for the year would be ambitious for many competitors, but based upon first quarter results, management has already exceeded the annual growth rate in the first quarter. The second quarter is usually the weakest comparison due to the spring breakup. But activity should resume in the third quarter. In any even robust growth is predicted for the year and probably well into the future. Best of all, the growth and the dividend is forecast to be funded by cash flow. No additional debt or sales of shares is needed.

(Canadian Dollars Unless Otherwise Indicated)

Source: Whitecap Resources, July, 2017, Presentation.

As shown above, the company predicts cash flow at nearly C$500 million. It could be a little below that if WTI stays below $50. However, production is currently running above expectations, so the cash flow guidance shown above is still a possibility.

(Canadian Dollars Unless Otherwise Indicated)

Source: Yahoo Finance At Market Close On July 3, 2017

The market cap is C$3.42 billion plus another roughly C$850 million of debt. Then the enterprise value is about C$4.27 billion. The enterprise value is a little more than 8 times cash flow. For a well managed growing company that is cheap. The stock is probably about 20% undervalued just considering growth. But the investor also would invest in some very resilient growth. This company has some of the lower costs (as demonstrated by the unusually high profitability of company projects). So the company can grow profitably in some remarkably hostile industry conditions.

The roughly 17% annual production growth plus the 3% dividend make an attractive return. This management has a habit of making acquisitions that could periodically add to that return. This is a remarkably agile but mid-sized company that probably deserves consideration for a place in an investment portfolio as part of a basket of similar companies.

Companies like this with low costs and a decent growth rate, may rate consideration as a long term holding through the industry cycles. This company will not be hurt as badly as a lot of competitors with higher costs. Plus there are still a lot of intervals not yet explored by the company. So there is potentially many years of profitable growth ahead. Any pullback in the price of this stock could be a buying opportunity.

Disclaimer: I am not a registered investment advisor and this article is not advice to buy or sell stock in any company. The investor needs to do his own independent investigation that includes reading the company governmental filings and press releases, as well as anything else relevant to determining if this company fits the investor's risk profile.

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.

Analyst’s 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.