CIBC updateWHITECAP RESOURCES INC.
Updating Estimates With XTO Energy Acquisition Our Conclusion We are incorporating the XTO transaction and updated guidance into our estimates.
We continue to believe the transaction represents an opportunistic acquisition that adds decades of corporate inventory at an attractive price of ~$0.5 million per undeveloped well or ~$1.1 million per unbooked well at a conservative density of one well per section (after netting out the value of PDP reserves). While the initial reaction was focused on the incremental leverage Whitecap is taking on through this all-cash transaction, we believe these concerns could fade if commodity prices stay strong and debt repayment is accelerated. We are maintaining our price target of $15 per share and reiterate our Outperform rating.
Key Points
We expect excess free cash flow to be allocated primarily to the balance sheet. On strip pricing, the $1.8 billion net debt milestone can be achieved in Q4/22E with the $1.3 billion level reached in Q1/23E. We estimate the company will show above-average leverage in 2023 as compared to its peer group at D/CF of 0.4x vs. the group at -0.2x on strip pricing. If commodity prices decrease to US$70 WTI and $4.00 AECO, 2023E D/CF is ~2.3x vs. the oil-weighted group at 0.7x.
• Dividend growth and sustainability. The company highlighted an intention to increase its dividend as net debt milestones are reached and a target annual dividend of up to $0.73/share. We estimate corporate breakeven for the increased dividend and existing capital spending expectations to be US$50 WTI and $4.00 AECO pricing.
• Adding decades of inventory to drive organic growth. We estimate the addition of incremental acreage has added decades of drilling inventory. Further, we believe the ability to double production on the acquired acreage to a plateau of 50 MBoe/d to 60 MBoe/d over the next three to five years is a relatively low-risk target.
• Changes in estimates. Incorporating the impact of the transaction and preliminary capital spending and production guidance has driven our 2023E CFPS up 12% to $3.19 (from $2.84). Our production estimate of 168 MBoe/d (65% liquids) sits at the lower end of 2023 preliminary guidance of 168 MBoe/d to 174 MBoe/d. We estimate capital spending next year of $1.1 billion, towards the upper end of 2023 preliminary guidance of $0.9 billion to $1.1 billion.
• Valuation. Whitecap Resources trades at a 2023E EV/DACF of 3.5x and a 2023E FCF yield of 15% vs. the oil-weighted SMID cap group at 2.6x and 24%, respectively.
Investment Thesis We see Whitecap as the most balanced intermediate oil producer in our coverage universe, in that it is able to deliver a "Growth + Dividend" strategy at a wide range of oil price assumptions.
Price Target (Base Case): C$15.00 Our 12- to 18-month price target of $15.00 is based on a target 2022E EV/DACF multiple of 4.2x on strip pricing. We estimate strip net debt of $1601MM in 2022E.
Upside Scenario: C$25.00 Our Upside case implies 6.1x 2022E EV/DACF, based on a blend of 8.0x 2022E EV/DACF, and the stock price assuming the current trading multiple under a commodity scenario that is 120% of recent Strip Pricing.
Downside Scenario: C$8.50 Our Downside case implies 1.6x 2022E EV/DACF, based on a blend of 2.0x 2022E EV/DACF, and the stock price assuming the current trading multiple under a commodity scenario that is 75% of recent Strip Pricing.