Whitecap Resources: Just Keeps On Keeping On (OTCMKTS:SPGYF)

As the price of oil climbs back over $40 on positive vaccine/Biden election news, the best companies are rising with it. This includes Whitecap Resources (OTCPK:SPGYF) or (WCP.TO). Whitecap has been a long time favorite of mine for a number of reasons, but it comes down to solid, smart management at the end of the day. The company produced solid quarterly numbers yet again and continues to clean up the already solid balance sheet more and more every quarter. Expected production levels and Capex for 2021 have come in a little low, but I will wait and see how the next quarter shapes up before passing too much judgment on that. The price of oil continues to be the largest hurdle for any company in the sector, but I am bullish on the commodity itself going into 2021. In the meantime, I have no issue collecting the well-managed dividend while I wait.

Whitecap Resources Inc. announces third quarter 2020 results and continues to pay resilient dividend in an improving price environment | BOE Report (Source: Google)

How Was The Quarter?

At the end of October, Whitecap released Q3 numbers. The company reported GAAP EPS of -$0.03. As for revenue, the company reported $248.28 million, down 25% year over year, but a large jump from $150.47 million in Q2. Whitecap hit a homerun on production numbers again tallying 66,681 barrels a day. They were expecting 62,000-63,000. Part of this is likely sandbagging which I will get into a bit later as to what’s to come for 2021. Capex for the first three quarters has totaled $174 million. This is down 43% from a year ago which really speaks to the difficult times. Whitecap is holding firm on the expected total to hit $190 million by year-end, but they did raise the average production expectation up to 65,500 for the year.

(Source: Company Presentation)

Looking at the balance sheet, a lot of the recent improvements are due to the increases in the price of oil. As the company remains ~76% oil, it has the largest impact at the end of the day. The company observed a realized price increase before hedges/tariffs of 80% from the second quarter. This move in oil prices also increased the royalty rate from 9% to 14%. Funds flow for the quarter was $119.3 million, or $0.29 per fully diluted share with a total Q3 payout of 26% and a year-to-date total of 74% total payout ratio. They ended the quarter with net debt sitting at $1.15 billion. For reference, total capacity remains $1.77 billion. Whitecap’s EBITDA ratio sits at 2x, and their EBITDA to interest ratio is at 12.5x. Both of which fall within their debt covenants. There is room for things to get worse if need be.

What’s Next?

(Source: TIKR.com)

Looking forward to 2021, expected production is noticeably low considering the numbers they have posted and what we have been told over the last 6 months (81,000-83,000). This is where the company fielded the most questions when it came to the earnings call. As I mentioned off the top, part of this could be sandbagging. In other words, they could be trying to come in low to beat expectations as they have in the last couple of quarters. Looking above, we can see that production will be increasing above 2019 levels next year, which is positive, but that is without accounting for what the company has added through acquisition. Capex was also cut on the high end of the range from $300 million to $270 million. I was hoping this number would be closer to $300 million, which is still possible if the oil environment turns around like I think it will.

Something to keep an eye on with Whitecap is the M&A front. The company is in a position where they may continue to look at picking up assets as the bleeding continues for some companies in the space. I do think we will see more and more of this over the next six months. Whether or not Whitecap is involved I do not know. I know that they will continue to be smart, and do what is best for shareholders and the general state of the company. They defiantly have the space to continue to look at it, I just hope they issue as little stock as possible when it does happen. President and CEO President and CEO mentioned the following:

…maybe we start to bring strong on strong together versus many of the opportunities have been done in the past have been weak on weak. So that’s what we’re looking forward to. And, and again, we think we can participate in that. We think that NAL was one step in the right direction, we do think that there’s more opportunities for Whitecap going forward.

How Is The Dividend?

One of the signs of a safe dividend is no questions about it from analysts in the quarterly earnings Q&A. This was the case for Q3. Whitecap has always been very responsible about their dividend. They continue to make good choices about putting the health of the company first. I know some may not like the instability, but I would not ever recommend investing in a resource base company, solely for the yield. The only reason to invest in such a company would be for belief in the resource itself, which if I haven’t made obvious, I am bullish.

Diving into the dividend a little bit, it is still yielding over 5% at these levels, which is really good across the market. Especially being that I trust that it is safe. Looking below, we can see just how it is managed. Looking to what happened in 2015 with the price of oil, the company was forced to cut. But, as the environment improved, they raised the dividend. I along with other analysts clearly expect the same thing to happen here looking at the tail end of the chart towards 2021, which is slowly inching closer. (I can’t believe it’s mid-November!)

(Source: TIKR.com)

If you don’t believe me, take it from Grant Fagerheim:

Although, the current environment remains challenging, our team has been successful at reducing our cost structure and adopting our business plans to ensure our funds flow is more than adequate to support the current dividend and our capital program.

Obviously, if the oil tides turn again and we continue to see $40 or less commodity pricing over the next year, the dividend will come to a point where it is not safe. But for now, you can sleep well at night knowing you’re getting that 5%+.

What Does The Price Say?

As stated above, Whitecap remains one of my favorite oil and gas companies out there. The chart alone is one of those reasons. While many are still stuck below their 200-day moving averages, Whitecap has broken its moving average and already backtested once. This is very bullish. Now, we can all remember what happened in early 2020 (which was the last time the stock spent any time above the moving average), but something about this trip feels different. As I mentioned above, we need to see more positive action around the price of oil, but this is very encouraging. Looking below, we can see the last 4 years and observe just how much of a cap the moving average has been.

Note: All charts will be of the Canadian listing, WCP.TO. The US listing is SPGYF. This is simply due to the average volume on the TSX being much higher.

(Source: TC2000.com)

When I wrote about how Whitecap was a “Must Own Oil Stock” in September, I talked about the $3.60 level. We got really close to that on Tuesday but topped out at $3.44. Looking below, we can see why this is so crucial. We have officially filled the gap created from the COVID crash in early 2020 and tested previous support levels from years past. I’m not sure that we just barge on through this level without a power move from oil.

(Source: TC2000.com)

For that reason, I think it is very possible we see the stock retract a bit before making that move. Because of that, I am looking back at the $2.80 level for support. Not only would this essentially be a nice bounce off the 200-day moving average, but it would line up with previous resistance that we have not really had a clean backtest of yet. This is ~15% from the current price, but if 2020 has taught me anything, that could happen in 2-3 days or less. I would be using this level as a stop if you are not interested in holding long term. Because I am well over 100% up on the stock, I will let the majority of my position ride for now, and I also love this stock more than any other. Bias, I know.

(Source: TC2000.com)

I still firmly believe this stock will easily see $5 in the near future. My short-term price target is currently sitting at $4.30. This is right where we tightened up before falling off a cliff in a single day back in March. It’s not going to be clean, but I am willing to hold a great company like Whitecap Resources.

Wrap-Up

As you can see, Whitecap Resources remains one of the best oil and gas plays on the market. I think investors will get a better return here than they will from some of the other large players in the space, and for my money, a much better management team. Very few players will actually be looking to acquire assets in a time like this, and as long as it’s done responsibly, that’s the kind of company I want to own for the long term. The dividend is a nice bonus while we wait for the price of oil to return to sustainable levels. The stock may bounce in the short term, but I am very bullish on Whitecap in the long term. Stay safe out there!

Disclosure: I am/we are long SPGYF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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