Whitecap Resources Inc T.WCP

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FCF to Drive Shareholder Returns, New Energy Initiatives Taking Shape

OUR TAKE: Neutral. The company expects to hit its long-term net debt target and is generating plenty of FCF for increased shareholder returns. Production is expected to target modest (3-5%) growth. New Energy initiatives continue to take shape and could generate an alternative form of stable cash flow and improve the company’s overall environmental footprint.

KEY POINTS

Balance sheet in great shape. WCP expects to hit $800M of net debt in Q2, which is its long-term target, equivalent to 1.0x D/EBITDA at $50 WTI (@130 mboe/d). At strip pricing, the company estimates hitting $500M of net debt by YE 2022. The company sets a debt limit of 2.0x D/EBITDA at $50 WTI or about $1.6B of net debt.

M&A bid/ask spread has widened. The company has always used M&A as a means of growing the business. Several acquisitions over the past year were completed at much lower commodity prices (oil and gas) and now the company is seeing the fruits of its well timed acquisitions. With commodity prices rising, we do expect accretive transactions to be harder (but not impossible) to find. As the company continues to lower its debt below its long-term target, it is positioning itself to be able to offer cash for potential transactions (which we favor given the low valuation with which the industry currently trades). Any acquisition is likely to be in one of the company’s core areas. The highest return areas include Charlie Lake, Montney and Liquids Rich Gas.

FCF Allocation steady. The company targets 50% of discretionary funds flow to shareholders. This includes both dividends and SBB. WCP targets the dividend to be sustainable at $50 WTI (unhedged) and expects to grow the dividend roughly in line with production. To-date the company has avoided a special/variable dividend, but it is not off the table (but more likely in 2023 in our view, especially if M&A opportunities do not arise).

Capex set for modest growth. WCP pegs its sustaining capital at $650M (131 mboe/d, 21% decline, $23,500/boe/d). In 2023, the company plans on spending about $740M and targeting YoY growth of 4 mboe/d (~3%) to 135 mboe/d.

Yield continues to be robust. In 2023, we estimate WCP’s DAFCF Yield (strip) at 29% compared to the Canadian SMID cap average of 43%New Energy continues to push forward. WCP expects the Saskatchewan government to provide clarification on any additional incentives to promote carbon capture utilizing EOR by the end of this summer, and is positively disposed to EOR. The federal government is also expected to come out with the clean fuel standards by the end of 2022. The company already has 5 MOU’s in Saskatchewan (1.2-3.0 MT/yr) and is working on the feasibility study, which will be completed in early Q3/22 and cost <$2M. If the feasibility study reaches a favourable conclusion, work will start on the FEED study in H2/22. The project may include compression, transportation and sequestration and an FID is expected by mid-year 2023. In Alberta, WCP has a 2-3 MT/yr opportunity. They are drilling evaluation wells in 2022/23 and expects to be on-stream by YE 2024. This business is expected to generate infrastructure type returns (10-15%) and largely be fee for service.

Production and capex breakdown. In 2023, we expect the North AB and BC, Central AB, Western SK, and Eastern SK segments to account for 28%, 28%, 17%, and 28% of the total production, respectively (Exhibit 1). Capex spent on these segments is expected to be 31%, 21%, 20%, and 26% of the total capex (Exhibit 2), respectively. WCP expects to spend 2% of 2022E capex on corporate items.