After the recent rout, there are several opportunities, particularly in the Canadian oil and gas space. Thanks to tumbling energy commodity prices, TSX energy stocks have dropped 15% so far this month. One name that looks appealing amid some of the prospects in the current markets is Whitecap Resources (TSX:WCP). It has lost 12% this month and has returned 10% in the last 12 months.
Whitecap Resources: The higher return of capital to be a key growth trigger
For 2023, Whitecap Resources is expected to pay a total dividend of $0.58 per share, implying a juicy yield of 5.7%. In comparison, TSX energy stocks offer an average dividend of around 4%. It has increased its quarterly dividend thrice in the last 15 months. Many energy companies have distributed their excess cash via special dividends or via stock buybacks. However, Whitecap has chosen to raise its regular dividend. This indicates its confidence in future earnings and dividend reliability.
Moreover, it aims to increase dividends to $0.73 per share in the next few quarters. Interestingly, according to the management, these dividend levels are sustainable even if oil prices fall to US$50 per barrel. So, Whitecap seems to be an apt bet for income-seeking investors due to its handsome dividends.
Energy exploration and production companies have seen record free cash flow growth since late 2021. While these companies have been flush with cash, the capital expenditure (capex) and production growth have been flattish. So, the excess cash was used for debt reduction, and the rest was distributed among shareholders.
Should you buy WCP stock?
Whitecap Resources was no exception. In 2022, it reported free cash flows of $1.5 billion, representing a massive 115% growth year over year. At the end of 2022, the company had a net debt of $1.8 billion, implying a debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 0.7.
TSX energy companies have significantly reduced their debt balance and have improved balance sheets in the last few quarters. Thus, the sector as a whole has obtained a much better shape.
For 2023, Whitecap Resources intends to produce 161,000 barrels of oil equivalent per day. Of the total production, 64% is liquids weighted, and the rest is gas. The company will invest $925 million in capex this year and expect $881 million in free cash flows.
Note that, Whitecap aims to increase its capex by 36% in 2023, which will drive a 12% production increase to last year. The incremental capex is due to inflation and rising costs. Almost the entire sector is seeing a record increase in drilling costs and other expenses. Thus, companies will see a minimal rise in production but will have to shell out much higher in capex.
On the valuation front, Whitecap Resources stock is trading at a free cash flow yield of 15%, which is higher than the sector average. Its price-to-earnings ratio is four times its earnings and indicates a discount compared to its peers.
Oil prices could remain under pressure in the short term but will likely move higher later in the year. Undervalued names like WCP will likely play well in the strong price environment due to its higher production. Moreover, its higher expected dividends and a strengthening balance sheet will likely create considerable shareholder value.