As Russia began to invade Ukraine early Thursday morning, we saw WTI break through the $100 mark. Shortly after, Whitecap Resources Inc (OTCPK:SPGYF) reported record fourth quarter earnings. The big story here is the growth of free funds. Whitecap allocates 50% of discretionary free funds to shareholders in the form of dividends and redemptions. Now is the perfect time to be a shareholder, and the best is yet to come.
How were the winnings?
Whitecap has set records in terms of production and fund flow. For the fourth quarter, we saw production climb to 120,020 barrels per day, an 88% year-over-year increase. Even more impressive, we saw fund flows of $351 million, a 234% year-over-year increase. Not bad!
2021 has been a good year for Whitecap. They completed and integrated four business acquisitions and two asset acquisitions. It helped them achieve the numbers you see mentioned above. The good news is that there is going to be further growth from here.
Looking at the forecast for 2022, we see Whitecap predicting that production will increase from 130,000 to 132,000 barrels per day with CapEx between $510 and $530 million. As for cash flow, they’re looking at $1.3 billion after capital and the dividend increase. The price of oil obviously has an impact here. When Whitecap first budgeted for 2022, it was using $70 WTI. Now they use $80 WTI. The extra cash flow on $10 is about $300 million over any potential inflationary pressure they expect to see in the second half of the year. Whitecap is currently hedged at around 16% for 2022, which is well below what we have seen in previous years, helping to increase fund flows as prices rise.
Free cash flow Say what?
No for the fun part. What does all this excess cash mean for shareholders? This means a 33% increase in the dividend, and more to come. This pushes the yield up to around 3.9%. Whitecap has committed to return 50% of its discretionary fund flows. That’s why we saw them repurchase 19.3 million shares in Q4 2021. What does that mean for 2022? Well, it depends on the price of oil! Looking below, we can see that if Oil stays around $90 WTI, we could see up to $2 billion in funds flow. What we know right now is that the dividend as it stands at $0.345 per share this year, and the CapEx of around $520 million, leaves room for that much cash be returned to shareholders. On the chart below, shareholders would get 50% of the green bars based on what Whitecap has presented so far. This would be returned in the form of additional redemptions or dividend increases. If we continue to see $90+ over the next two months, we might even see special dividends.
Where are the rest of the funds going? Well, if you know Whitecap, you know they are ALWAYS considering mergers and acquisitions. I think 2022 will be a very different year given the high commodity prices and geopolitical issues that continue to arise. The reason Whitecap can continue to look for attractive assets is because of its balance sheet management. Whitecap closed 2021 with a leverage ratio of 0.9x (debt to EBITDA). The company expects this figure to drop to 0.2x by the end of 2022. Below we can see the fund flow allocation to date. This level of transparency gives shareholders a very good idea of how excess cash flow is being used, which is nice to see.
What’s exciting here is that there’s already $360 million in the pot waiting to be rolled out to shareholders, and that’s only based on 2021 results. they report as WTI remains high above $90. The reason they don’t deploy all that money is “just in case”. Whitecap has a history of cutting the dividend when oil crashes, and having the extra money on hand allows it to maintain the dividend over the long term. This makes it a much safer investment in the long run. It’s an extremely exciting time to be a shareholder and a loyal shareholder. The party has only just begun.
What does the price say?
Well, another two months have passed, so let me update some charts and price targets. We can start with the news that won’t shock anyone, but the valuation has increased further. Of course, this is due to the jump in free cash flow I mentioned earlier. When I wrote on Whitecap in mid-December, the fair value was $11.89. I also stated that my price target was $10 at the time. Let’s dive into where I moved it to at this point.
Let me start with where I see current support and where my stops are. Unfortunately, we haven’t crossed the $10.00 mark, so we can’t use it right now, but I have a feeling it’s coming soon! That said, we kind of find ourselves in a no man’s land right now, which isn’t great. Looking below, we can see why. There seems to be some support around the $8.00 mark in the short term, but zooming out we can see that it proved to be useless in 2018. Whitecap being my biggest holding, I would sell probably half if we break through the $8.00 level to lock in profit.
The next step would be $6.50. This is where I would look to add back what I got stopped out of, or if it broke, liquidate the whole position. That would require a 30% drop from current levels, which is way more than I would usually risk. If this is just a normal holding, I would recommend $8.00 or somewhere slightly below to protect principal.
Enough chatter, let’s see where I think we’re headed. Looking below, we can see two targets. The first is the $10.00 mark that I mentioned in previous articles, there is clearly a huge wall of support here. I think we’re going to see that level drop very soon. I think we might see a negative reaction test first, but I don’t expect $10.00 to act as resistance beyond that. Then I look at $12.90. We can see that the path to $12.90 once we get above $10.00 is quite clear. I think once we get above $10.00 we could consolidate in the near term, allowing the moving averages to catch up while building a good base for future resistance before running to $12.90 and beyond .
I have a large exposure to mid-cap Canadian oil stocks. Whitecap is the largest holding, followed by Nuvista Energy (OTCPK:NUVSF), MEG Energy (OTCPK:MEGEF) and ARC Resources (OTCPK:AETUF). I think there is still a lot of potential in these names, given the current macroeconomic outlook. They have been and continue to be held long term in my portfolio.
As you can see, Whitecap continues to impress. The biggest potential risk here is the oil price correction, but with breakevens at $40 WTI, there is incredible potential here. Whitecap is going to continue to produce waves of free cash flows, and those waves will flow straight into shareholders’ pockets one way or another. I remain very bullish on both Oil & Gas and Whitecap. It’s the perfect storm, and there’s still plenty of room here if we continue to see high oil prices over the long term. I’m already looking forward to seeing the first quarter results. The best is yet to come.