Whitecap Resources Stock: This Is How I Love To Play The Oil (OTCMKTS:SPGYF)

Introduction

Whitecap Resources (TSX:WCP:CA)(OTCPK:SPGYF) just released its 1Q2024 results. As expected, the results were excellent, plus the management raised the production guidance without increasing the Capex, which was great news for investors.

In this article, I am going to touch on the quarterly earnings briefly. I am then going to build a future projection, valuation, and sensitivity analysis.

A few days ago, well-respected investor Dr. Eric Nuttall suggested slowly selling down the Canadian Natural Resources (CNQ:CA)(CNQ) and moving down to midcaps as they didn’t have the run-up in valuation as CNQ had.

That’s exactly what I wrote a month ago in my CNQ thesis, and it’s been working well for me so far.

Despite recommending the midcaps, Nuttall didn’t recommend buying Whitecap Resources. I am also going to dive into the reasons behind it.

Whitecap Resources

Whitecap is a midcap oil and gas producer with lands across Northern and Central Alberta and Saskatchewan with ~6k drilling locations & huge 25+ years of reserves.

Its production mix consists of ~64% liquids. Despite ~36% gas in the 2024 production, it is important to keep in mind that because of the low gas prices, it only makes ~10% of the revenue. ~90% of revenue coming from oil makes the stock performance much more correlated to oil prices than gas prices.

1Q2024 Update

This slide from Whitecap’s presentation represents the highlights for the quarter.

To the numbers, I would just add that the FCF was negative for the quarter as the company spent ~40% of its planned full-year Capex, so there is nothing wrong with that.

With a high expected FCF for the full year, all above the base dividend should be directed to buybacks.

My biggest takeaway from this quarter is the increased guidance by 2.000 boe/d with no change in the capital budget. This is a reflection of much better wells performances.

What’s in the future for Whitecap’s investors?

I am now going to build up the projection model, which I will use to value the company.

• Oil & gas prices – I am assuming US$80 WTI, which is close to the current strip and AECO, rising to C$3.5 in 2025 following the strip.
• TMX impact – We all know that the coming TMX pipeline has already significantly shrunk the heavy oil discount. The TMX, in fact, not only improves the heavy oil discount but also improves the whole Canadian oil sector. As Whitecap CEO explained, the Canadian light oil discount to WTI is now also expected to shrink significantly, which could bring an additional ~US$5/bbl revenue. I am building the base case scenario with this significantly lower Canadian light oil discount. Keep in mind that this upside is questionable, as nobody knows how the differentials will behave. They might be low for a year or two but wider again, as I expect the Canadian export capacity will not keep up with the future production output growth, which might create a bottleneck in export, widening the discounts.

We all have different opinions about the future of O&G prices. After we go through the valuation, I will make a sensitivity analysis with different price assumptions.

• Production growth – The goal is to get the company to a production level of ~210.000 boe/d. That represents a CAGR of ~6.1% from the 2023 production output of 156.500 boe/d.
• Realized prices – Based on the shrunk discounts to WTI, I expect much better prices already in 2Q of this year.

• Netbacks – I expect nearly flat costs but improved netbacks due to higher revenue per barrel caused by those narrow discounts.

• Capex – The output growth needs to be supported by spending for growth. The company plans for a Capex of C$0.9-1.1B. I am going with the midpoint. C$750M is spent just to offset the natural production declines. As the output grows, the maintenance Capex will grow in line with it.

Here is a summary of all the projections.

Due to those narrow discounts, we could already reach very high yields this year and grow fast. The base dividend of 6.7% costs the company ~C$435M, and a similar amount could go to buybacks this year.

If the company switched to the no-growth mode in 2028 and just spent to offset the declines, the yield could reach 28% with assumed oil prices.

Valuation

We can see the value from those projected buybacks and dividends. Anyway, if I apply a 12.5% discount rate, which I use across the Canadian oil sector, we arrive at a fair price of C$21, double the current price.

This does not necessarily mean that the price will double but rather that the market assumes much worse commodity prices or simply requires much higher returns.

I am not a fan of trading around valuation multiples, but I believe many experienced investors are. If you are one of them, here are the resulting valuation multiples from my assumptions.

Sensitivity

The main risk for any commodity-producing company comes from commodity prices.

I am running the same PV12.5 valuation under different oil and gas prices to see where the company’s breakeven is and how much leverage toward the oil the company has.

The analysis shows that the company makes enough FCF to offset the production declines even with a US$45 WTI and is fairly priced for oil at US$60-65 WTI.

Still, we don’t know how the differentials will play out. I am running the sensitivity analysis one more time, but now, with no benefits from the narrow differentials. In that case, I would lower the price target to C$19 from C$21.

Why does Nuttall say no to Whitecap?

From the valuation, we can see clearly how cheap, and I dare to say undervalued, Whitecap is. Whatever discount rate one uses, investors should always compare the thesis to the other opportunities in the market.

Whitecap Vs. Crescent

Crescent Point Energy (CPG:CA)(CPG) is my largest oil holding. I recently prepared a five-year projection and couldn’t help but notice how similar the company is to Whitecap.

I don’t know who copies who, but the similarities make me think the managers are in touch on a daily basis.

Both Whitecap and Crescent own lands in the same geographical areas, with a similar amount of drilling locations. Both were active in the acquisitions and now, after accounting for the growth plans, have 20+ years of reserves. Both strongly focus on improvements in the wells’ designs and are informing investors that the new wells result in better-than-expected output performances.

They have nearly identical production output, production mix, and cost structure, which makes their sensitivities to oil and gas prices very similar.

This can all be observed from the very strong correlation of their stock prices.

There are a few things that differ.

Crescent has a faster decline in production and a stronger growth plan. That means Crescent needs to spend more on sustainable Capex as well as growth Capex. While Whitecap is planning to spend C$1B in 2024 Capex, Crescent plans C$1.5B.

This results in stronger output growth from Crescent, while Whitecap can immediately send more money into shareholders’ pockets via dividends and buybacks.

Overall, Crescent is growing faster, has a larger tax pool, and realizes slightly better prices.

Here is my Crescent projection for your comparison.

When applying the same PV12.5 valuation, Crescent seems even cheaper with a price target of C$27 or ~125% upside.

Both names are priced very low, and one should not decide based on minor differences in DCF valuation results. As I like to say: “Long-term projection is like looking through a telescope; adjust the inputs a little bit, and you are looking at a different galaxy.

The main reason why Nuttall and I prefer Crescent is the promise from management that they don’t want to be part of any acquisitions for at least the next two years, while Nuttall said that Whitecap’s management thinks about themself as having an edge in acquisitions and are willing to participate if they see a good deal.

The issue with acquisitions is the paid premiums and often issuance of new shares, but also the simple fact that the market is willing to pay a premium for high shareholder payouts, which we can see with CNQ, for example.

My Investment Decision

Nearly all metrics are toe-to-toe, with a difference in the timing of the payouts. Crescent comes with a higher debt and more spending for output growth. Thus, I expect it will take a bit longer before the higher dividends land in my pockets.

Insider trading activity also suggests that both names are cheap as, in both cases, there is strong buying activity.

Despite the name change, I am biased towards Crescent, and I really do not like the extra risk of potential acquisition.

Since both names appear undervalued, It might be a great idea to spread the idiosyncratic risk and have them both in a portfolio. I see nothing wrong with that and do not consider it “diworsification”.

I believe that with the TMX tailwind and high dividends and buybacks, Whitecap is a strong buy at these levels.

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.