Whitecap Resources Inc.
(WCP-T) C$5.39
Q1/19 Beat - Strengthening Oil Prices Drive Dividend Increase Event
This morning, Whitecap announced Q1/19 results, increased its dividend, and provided an operational update.
Impact: POSITIVE
Q1/19 results were modestly ahead of expectations, with CFPS of $0.39 exceeding TD ($0.38) and consensus ($0.37). Relative to our forecast, several slightly lower costs drove the beat. The improvements were only in part due to WCP's adoption of IFRS 16, as certain contracts which were previously accounted for as operating leases are now recognized on the balance sheet. Specifically, funds flow increased by $2.6mm (less than $0.01/sh) as a result of WCP's IFRS adoption.
Production of 70.7 mBOE/d was slightly ahead of TD and consensus (69.3 mBOE/d and 69.7 mBOE/d), and unsurprisingly down q/q. Whitecap maintained annual guidance of 70-72 mBOE/d and Q4 guidance of 77-79 mBOE/d.
Whitecap anticipates increasing its dividend by 5.6%, to $0.342/year, resulting in a robust 6% yield. The increase represents only a ~$7.5mm increase in annual obligations, which we view as very manageable given the company's forecast free cash flow generation this year. On forward strip pricing, we estimate that Whitecap will generate $124mm of cash flow in excess of the increased dividend, even while spending at the high end of their capital guidance range.
Whitecap will prioritize bolstering its balance sheet, with the first $100mm of free cash flow to be used to reduce bank debt. We forecast 2019E leverage of 1.7x, which compares to the peer group at 2.1x. Very importantly, on the conference call, Whitecap emphasized a focus on debt repayment rather than the pursuit of M&A.
The company noted further strength in the Lower Shaunavon of Southwest Saskatchewan. Recent wells generated IP60's of 122 BOE/d, which is 39% above expectations. Whitecap has 200+ Lower Shaunavon locations, and is planning 7 wells through the remainder of the year.
TD Investment Conclusion
We are encouraged that Whitecap's FCF proposition is playing out in tandem with improving commodities. The 6% dividend is not onerous at only 19% of cash flow, and debt could be materially reduced this year. Meanwhile the low-decline asset base and healthy hedging strategy provide defensiveness should conditions worsen. Our estimates are largely unchanged, and we reiterate our BUY recommendation and $9.00 target