TORC Oil & Gas Ltd. VREYD

RBC Upgrade (WCP)

[retiredcf]

Their upside scenario target is also raised to $8.50. GLTA

February 24, 2021

Whitecap Resources Inc. Q4/20 – Building dry powder

Our view: Whitecap’s Q4 results were as expected, with investors squarely focused on the year ahead. On the back of the recent surge in commodity prices combined with the completion of the NAL/TOG acquisitions, the company can focus on integration and allocation of significant free cash. In our view, Whitecap is well positioned to take advantage of incremental acquisition opportunities and will likely increase capital given a conservative second-half program.

Key points:

• Q4/20 in line with guidance. Q4 volumes of 63,783 boe/d were as expected, driving CFPS of $0.25 vs. consensus of $0.25; key variances to our estimates are noted in Exhibit 2. Capex of $21.7 million was focused on drilling and completions (RBC: $21.4 million, Street: $20.3 million).

• 2021 guidance unchanged but very conservative, in our view. Management left 2021 guidance unchanged, with capital spending of $280–300 million expected to drive production volumes in the range of 100,000 boe/d at the midpoint. We think this is highly achievable and likely conservative. We assume an increased capital program in H2/21 with total capital of $400 million driving volumes of 104 mboe/d. In 2022, we model a capital program of $600 million driving volumes of 111 mboe/d, mapping to organic growth of 7%.

• Significant free cash generation backstops optionality. Based on our updated estimates, and inclusive of an increased program in H2/21, we expect the company to generate post-dividend free cash flow of $483/ $527 million in 2021E/22E. In our view, this sets the company up to allocate more to the drillbit, bolstering organic growth, and/or execute strategic tuck-in acquisitions. While the company can certainly digest something of larger scale, we believe a measured approach to deals is most likely near-term given that the integration of NAL/TOG is ongoing.

• Base reserves impacted by evaluator pricing. Whitecap’s base reserve update was decent despite macro headwinds, with 2P reserves mapping to 507 mmboe (flat y/y). PDP finding costs of $19.25/boe, drove a recycle ratio of 1.1x, with negative revisions primarily driven by evaluator price deck changes. Pro-forma, the company now has 703 mmboe of 2P reserves in the portfolio, mapping to a 2P RLI of 19 years, as shown in Exhibit 4.

• Balance sheet remains healthy. Whitecap has sufficient near-term liquidity to weather significant pricing volatility and we note that a majority of its debt is termed out to 2022+. We see D/CF of 1.0x/0.3x at year-end 2021E/22E (peers 1.6x/0.8x), with absolute debt levels falling by roughly $500 million per year.

• Recommendation unchanged. We maintain our Outperform rating and raise our price target to $7.50/share (from $7.00) on increased estimates. Whitecap shares currently trade at 4.4x/3.1x 2021E/22E EV/DACF vs. peers at 3.4x/2.4x. In our view, a premium multiple is warranted by the company’s strong balance sheet, leading FCF profile, and seasoned management team.