Whitecap Resources Inc T.WCP

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[retiredcf]

Their upside scenario target is now a double ($18.00). GLTA

June 30, 2022

Whitecap Resources Inc. Show me the Montney

Our view: We view Whitecap's acquisition of XTO Energy Canada favourably given significant development runway, asset diversification, and the potential for an enhanced return of capital profile longer-term. The deal adds 32,000 boe/d of current production alongside regional infrastructure and roughly 500 Tier-1 drilling locations in the Montney and Duvernay plays. The company also increased the base dividend by 22% and refreshed its ROC framework.

Key points:

• Whitecap acquired XTO Energy Canada for a net purchase price of $1.7 billion. Whitecap agreed to acquire XTO for $1.9 billion, mapping to $1.7 billion inclusive of a positive working capital adjustment of roughly $200 million at close (October 1, 2022). Transaction metrics of $54,000/boe/d and roughly 3.8x CF are above public comps and roughly in-line with the recent VET-LXE transaction (note here), see Exhibits 1/2 for details.

• The acquisition builds on Whitecap's existing Montney footprint. The XTO package added 567,000/72,000 net acres across the Montney/ Duvernay regions, adding 1,693/217 net drilling locations. Whitecap now holds 638,000 total net Montney acres with 2,112 net drilling locations in aggregate. Over the next 3-5 years, management plans are to grow the asset from current volumes of 32,000 boe/d to a plateau of 50,000-60,000 boe/d. Current inventory is sufficient to maintain this level of production for more than 20 years. The assets include regional gathering infrastructure and an operated 165 mmcf/d shallow cut gas processing facility in the Kaybob area.

• Estimate changes. Our 2022E/23E production estimates increase by 6%/26% following the XTO acquisition. Combined with adjustments for our margin/mix assumptions and our updated price deck (note here), CFPS increases 17%/35% in 2022E/23E. We have also increased our capital spending estimates by $50/$300 million to $620/$1,100 million, in-line with updated guidance.

• Balance sheet supports transaction financing, return of capital. We forecast WCP to hold $1,510/$221 million in net debt by year-end 2022E/23E, mapping to 2022E/23E D/CF ratio of 0.6x/0.1x, compared to oil-weighted peers at 0.4x/nmf. The team remains focused on managing leverage, expecting to hit $1.3 billion in the first half of 2023, equating to a sub-1.0x leverage target at US$50/bbl pricing. The company increased its dividend by 22% to $0.44/share, with additional dividend increases planned when debt hits $1.8B (by year-end) and $1.3B (H1/23). Management has set a long-term target of $0.73/share (RBCe Q2/23).

• Reiterating Outperform rating. We maintain our Outperform rating and have raised our price target to $16/share (from $14/share). Whitecap currently trades at 2.7x/1.8x 2022E/23E EV/DACF, compared to oil- weighted peers at 2.6x/1.5x. In our view, Whitecap warrants a premium multiple, supported by the company's strong balance sheet, FCF profile, continued ESG leadership, and seasoned management team.