April 27, 2023
Whitecap Resources Inc. Q1/23 – Right around the corner
Our view: Q1 volumes were impacted by minor outages, with CFPS ahead on lower than expected cash costs (primarily tax). Management underscored debt reduction, operational strength across key plays, and liquids optimization given the deterioration in gas pricing. We expect the company to hit its $1.3B net debt target by Q3, shifting 75% of free cash to shareholder returns, though well socialized.
Key points:
Q1/23 volumes light, ahead on CFPS. Q1/23 volumes of 155,124 boe/d (66% liquids) were a snick below RBC/consensus estimates of 156,637/156,800 boe/d. CFPS (f.d.) mapped to $0.73, 5% ahead of RBC/ consensus estimates of $0.70/$0.70, driven by lower cash costs (primarily taxes). E&D capital totaled $254 million, 4%/5% below RBC/consensus estimates of $265/$267 million, and was allocated to a 69-well program (60.8 net wells). See Exhibit 1 for key variances and estimate changes.
Nudging near-term liquids mix higher. While overall guidance remains unchanged, Whitecap tweaked capital allocation to increase its liquids weighting in the front half of the year, though the overall impact is marginal. Management shifted $20 million from Northern AB to the Glauconite for 4.4 higher liquid net wells and swapping a 4-well pad at Lator (Montney) for a higher liquids 4-well pad in the Duvernay. Supply chain issues (now resolved) also prompted a $40 million shift of Montney capital into Q2–Q3.
Net debt target well within sight. Whitecap closed Q1/23 with $1.5B in net debt (RBCe: $1.4B) and is poised to reach its $1.3B net debt target by Q3/23, slightly later than expected when announced with the XTO acquisition, though driven by commodity pricing. We note that management reiterated a pause on M&A for 2023 (note here) with the near-term focus on integration and debt reduction. Whitecap expects net debt to fall to $1.0–1.2B in 2024; our updated forecast places 2023E/24E net debt at $1.1B/$810 million (0.5x/0.4x D/CF).
Next phase of RoC right around the corner. Upon reaching the $1.3B net debt threshold, Whitecap will allocate 75% of FCF to shareholders through its target dividend ($0.73/sh) and share buybacks. We currently forecast a base dividend increase to $0.73/sh (annual) effective Q3/23. We also model a return toward active NCIB utilization effective Q3/23, with total buybacks of $244/$421 million in 2023E/24E.
Reiterating Outperform rating. We maintain our Outperform rating and $14/share price target. Whitecap currently trades at a premium to oil-weighted peers (Exhibit 3/4). We believe a premium multiple is warranted given a sustainable FCF profile, ESG leadership, seasoned management team, and debt reduction/RoC thresholds providing key near- term catalysts. Management will host its Q1/23 conference call on April 27 at 11AM ET. Dial-in: 1-888-390-0605.