Investors had high expectations from Whitecap Resources (TSX: WCP), and it delivered. The Canadian mid-cap upstream energy company reported its first-quarter earnings on April 26, 2023. It reported higher production, mainly due to its completed acquisitions. While realized oil and gas prices tumbled nearly 20% during the quarter year over year, Whitecap’s funds flow only decreased by 10%.
Whitecap Resources impresses in Q1 2023
Whitecap Resources has returned 10% in the last 12 months and 760% in the last three years. It seems well on track to increase dividends in the next few quarters. The stock currently yields a decent 5%, which is a premium to some Canadian energy giants. The potential dividend hike will increase its yield further, making it a more appealing bet in the current environment.
Whitecap Resources saw its production reach 155,124 barrels of oil equivalent per day in Q1 2023, representing a decent 17% hike year over year. The production growth was mainly due to its recently completed XTO Energy acquisition. While the acquisition drove production growth, it also pushed the company’s leverage higher.
While almost the entire sector is aggressively trying to deleverage, Whitecap saw its net debt rise from $1 billion to $1.5 billion in Q1 2023. However, it does not seem too high and is quite manageable. The energy producer aims to deleverage in the coming quarters. Whitecap is targeting a net debt target of $1.3 billion, which will probably be reached in the second half of 2023.
Commitment to increase shareholder returns
Once this target is achieved, the company aims to increase its dividends to $0.73 per share. Note that very few companies in the Canadian energy space currently prefer to distribute their excess cash via regular dividends. Many of them are doing a combination of share buybacks and special dividends. So, a regular dividend increase on Whitecap Resources’ part is noteworthy. It indicates that the management is confident about its future earnings growth and shows its balance sheet strength.
Whitecap has been expanding in the lucrative Montney play for the last few years. These have mainly been low-decline reserves that produce light oil, which commands premium pricing over the WTI benchmark. The management aims to reach a total production of over 200,000 barrels of oil equivalent per day in the next five years. Higher production amid the strong price environment makes WCP an attractive bet. Plus, its declining debt and increasing dividend speak to its fundamental strength.
WCP stock trades 7 times its earnings and 7 times its free cash flows. That indicates a fair valuation compared to peers. Considering its potential balance sheet improvement, financial growth visibility, and growing dividends, WCP warrants a premium valuation. So, we might see decent value creation in the next few quarters as the valuation multiple adjusts upwards.
Investor takeaway
Many TSX energy stocks are well placed in the current environment, given their earnings growth prospects and debt reductions. If oil prices rally from here, TSX energy names will likely see even steeper growth, mainly due to their fundamental strength. Moreover, the valuations of some of them indicate a discount compared to their historical averages. WCP is one such value and, thus, could outperform its peers.
