Ignore the Latest Oil Crash and Buy This Driller

Get ready for oil’s next rally by investing in Whitecap Resources Inc. (TSX:WCP).

| More on:
woman data analyze

Image source: Getty Images.

Oil’s latest price collapse sees the North American benchmark West Texas Intermediate (WTI) trading at around US$52 a barrel, well below the multi-year high of over US$76 per barrel reached in early October 2018.

This has triggered fears that oil has entered a new bear market because of a growing global supply glut. While this has hit many energy stocks hard, it should not prevent investors from adding Whitecap Resources Inc. (TSX:WCP) to their portfolio.

Solid results

Whitecap reported some impressive third quarter 2018 results that underscored the quality of its oil assets. Average daily production shot up by an impressive 30% year over year to 75,529 barrels of oil weighted predominantly to light and medium crude, meaning that it isn’t exposed to the deep-discount applied to Canadian heavy oil.

And that, along with a solid increase in profitability as shown by Whitecap’s operating netback for the quarter rising by 29% compared to a year earlier to $32.78 per barrel produced gave the driller’s earnings a solid lift.

Whitecap reported funds flow from operations of $205 million, almost double a year earlier and an almost 19-fold increase in net income to $69.5 million.

The marked growth in profitability of Whitecap’s operations can be attributed to significantly firmer WTI prices, which more than offset higher transportation and production expenses. It is also worth noting that general and administrative expenses fell significantly by 15% year over year to $1.10 per barrel, while depreciation and amortization decreased by 4% to $17.86 a barrel.

This, along with a focus on reducing operational cost, should help to boost Whitecap’s profitability in coming months. The driller’s operating netback would have been higher had it not incurred a $5.69 loss per barrel because of its commodity hedges.

Nonetheless, now that crude has crashed again, those hedges will protect against the financial downside caused by WTI trading at less than US$60 a barrel. If oil does recover to see WTI trading at around US$70 a barrel as some analysts are predicting, Whitecap’s profitability will receive a healthy boost because a large portion of those risk management contracts are due to expire at the end of 2018.

That will reduce the losses incurred by those hedges should WTI firm to above US$60 a barrel, further boosting Whitecap’s profitability.

Whitecap also continues to strengthen its balance sheet, thereby reducing the risks associated with weaker crude. It finished the third quarter with long-term debt of $1.24 billion, which represented a 3% decrease over the same quarter in 2017 and was compliant with all lending covenants.

Oil likely to rebound

While crude has dropped sharply in recent weeks because of rising global inventories and fears that demand would weaken, the growing consensus among energy analysts is that it will rebound before the end of 2018.

That rally may not take it back to the multi-year highs witnessed over a month ago, but WTI could easily reach US$60 a barrel before the end of the year.

This is because the bearish sentiment surrounding the outlook for crude appears over baked, and OPEC at could very well announce further production cuts to lift prices and restore confidence to energy markets at its December meeting, which could give it a healthy lift.

Why buy Whitecap?

Whitecap is an appealing intermediate upstream oil producer that owns high quality light oil assets, thereby eliminating the financial impact of the deep-discount applied to heavy oil known as Western Canadian Select (WCS).

When considering that Whitecap’s oil reserves totalling 1.1 billion barrels have been independently valued at $12.79 per share after income taxes, more than double its market value, it indicates that the stock is very attractively valued.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Dividend Stocks

A plant grows from coins.
Dividend Stocks

2 Young TSX Stocks You’ll Be Glad You Bought in 10 Years

Youth means nothing when you plan to hold strong companies long term. These two TSX stocks should therefore be first…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

Is it a Trap? 3 TSX Stocks With Ultra-High Dividend Yields 

Who doesn’t love dividends? But the high-interest rate environment makes ultra-high dividends unsustainable. Are these stocks a value trap?

Read more »

Value for money
Dividend Stocks

3 Value Stocks for Superior Returns in 2023

Given their solid underlying businesses, stable cash flows, high dividend yields, and attractive valuations, these three undervalued TSX stocks could…

Read more »

Financial technology concept.
Dividend Stocks

2 TSX Value Stocks to Buy for Peace of Mind (and a Crazy-Good Deal)

2 TSX stocks that could outperform in the long term.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 of the Best Canadian Dividend Stocks I’d Buy Before March 2023 Ends

Here are two of the best Canadian dividend stocks you can buy on a dip in March 2023 to hold…

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

3 Value Stocks That Smart Investors Should Seriously Consider

You get it all with these stable stocks. They may have less growth now, but will have incredibly high growth…

Read more »

Chalk outline of two arrows pointing in opposite directions
Dividend Stocks

2 TSX Stocks I’d Buy Instead of Sitting on Cash

These two TSX stocks are my top choices if you want companies that are going to recover quickly after a…

Read more »

Canadian Dollars
Dividend Stocks

Want $1,000 Per Quarter in Passive Income? 2 TSX Stocks That Do the Job

Are you looking to earn $1,000 in passive income each quarter? These two TSX dividend stocks can help you achieve…

Read more »