In the energy space, most of the attention goes to large-cap producers. And for good reason. These stocks tend to provide better risk-adjusted returns over time. Accordingly, most of my analysis falls on larger-cap energy names as a long-term investor.
However, for those bullish on energy and commodities right now, midcap plays are increasingly intriguing. Indeed, midcaps such as Whitecap Resources (TSX:WCP) provide more aggressive exposure to commodity prices — something that’s good for those bullish on a specific trend. In this light, it’s perhaps unsurprising to see Whitecap has nearly tripled from its 52-week low approximately one year ago.
Here’s why I think more upside could be on the horizon for this midcap energy player.
Analysts approve of Whitecap’s outlook
It turns out I’m not the only one bullish on Whitecap. Indeed, analysts are starting to become more bullish on this company of late. The reasons seem clear and obvious to me. However, many investors may simply not have these stocks on their radar right now.
For those covering this stock, Whitecap’s relatively strong balance sheet is the key to this stock’s investment thesis. Because of its strong balance sheet, Whitecap has been able to acquire assets at a time when others are selling. For those bullish on the continued recovery in the energy sector, these moves allow for potential outsized cash flow growth.
Accordingly, on a forward-looking basis under aggressive assumptions, Whitecap still trades at a dirt-cheap level today.
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Oil prices remain elevated
Of course, a significant portion of the ownership thesis for Whitecap relies on energy prices remaining strong. This is the key monkey wrench many investors are unsure of right now.
With WTI oil currently trading a hair shy of US$70 per barrel, Whitecap is set up nicely for continued cash flow growth. As long as oil prices continue to remain around these levels, Whitecap’s long-term prospects appear bright.
Indeed, as demand for energy is expected to skyrocket coming out of this pandemic, Whitecap’s position in the market could become much more insulated. Whitecap is actually has the potential to grow into a large cap stock over time. If the company can continue to consolidate the midcap space, such a reality is possible.
Accordingly, investors may be encouraged by the company’s recent higher-than-expected production forecasts and acquisition deals. In a rising oil price environment, these could turn out to be steals for aggressive investors today.
Investors need to be reminded that Whitecap remains a higher-risk, higher-reward play in the energy space. Additionally, a number of things have to go right for Whitecap stock to continue to climb.
Thus, it’s important investors keep such holdings as part of a well-diversified portfolio. The potential long-term returns Whitecap could provide are certainly juicy. Indeed, there are few energy plays with the kind of growth potential Whitecap provides.
However, investors may want to balance such a position with other lower-volatility names in a well-diversified portfolio.
Like this midcap energy play? Here's another energy play to consider right now:
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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 Chris MacDonald has no position in any of the stocks mentioned.