Whitecap is poised to perform
Strong balance sheet, growing production and room for dividend increases
Whitecap Resources (WCP.TO) is one of the strongest oil plays in the Western Canadian Sedimentary Basin. The company guides to production of 131,000 barrels of oil equivalent (BOE) per day based on a capital program of $520 million. Whitecap’s excellent corporate presentation projects cash flow in 2022 of $1,376,000,000 and free cash flow of $856,000,000 which, after dividends of $170 million leaves uncommitted free cash flow of $686,000,000. Whitecap has only 16% of its output hedged for 2022 and those hedges are at approximately $63 to $66 per BOE.
I build my own models of energy companies and my model for Whitecap suggests the corporate guidance is “sandbagging” the outlook a bit, a sensible approach for a management that typically underpromises and overdelivers. In my model for 2021, I included $275 million for share buybacks and a“contingency” expenditure to line up Whitecap’s year end debt with its corporate presentation. My model is based on a commodity price of CAD$60 per BOE on average for 2022. Current commodity prices are materially higher than I have modeled. Here is my model:
As I see 2022 for Whitecap, the shares have a fundamental value of about $12.50 a share and are currently trading for about $7.50. My valuation is based on a ratio of Enterprise Value to EBITDA of 5 times and I use a multiple of 10 times free cash flow before dividends as a cross check.
There is a lot of water to run under the bridge before 2022 is over, but it is clear to me that Whitecap is materially undervalued at current commodity prices; has significant free cash flow which gives management a lot of options to raise dividends, buy back shares or increase drilling, all without imperiling a rock solid balance sheet. Based on my model and excluding any increases in dividends or share buybacks, I see the company’s debt falling to about $300 million by year end 2022 making it one of the least leveraged oil plays in Canada.
I own 35,000 shares of Whitecap.