Alberta Will Detail New Oil Royalty Incentives in November: This Monthly-Paying Oil Stock is Ready

Whitecap’s dividend has a reported cash cushion, while Alberta’s planned royalty changes still need project-level scrutiny.

Key Points
  • Royalty benefits depend on the final rules and eligible projects.
  • Stress cash generation before annualizing a strong oil quarter.
  • Monthly dividends still carry commodity and share-price risk.

A government incentive can make investors start spending the savings before anyone explained who actually gets them. That’s where I’d be careful with Alberta’s proposed royalty changes.

Premier Danielle Smith has said the province plans to announce a preferential royalty framework in November aimed at encouraging new oil and gas production. What we still don’t know is which projects qualify, when the new rules take effect, or how much individual producers might actually save.

So I wouldn’t build a dividend thesis around the announcement yet. I’d rather own a producer that can fund its plans under today’s rules and treat any royalty break as a bonus. Whitecap Resources (TSX: WCP) looks much more interesting through that lens.

Colored pins on calendar showing a month

Source: Getty Images

Start with leftovers

Oil companies can produce some very impressive cash-flow numbers when commodity prices cooperate. Shareholders don’t get all of it. Wells still need drilling, facilities need building, and existing production needs money simply to keep running. That’s why I care much more about what remains after capital spending.

Whitecap generated about $1.4 billion of funds flow in the second quarter and spent $430 million on capital expenditures. That left roughly $924.5 million of free funds flow. Dividends declared during the quarter came to about $221.4 million. So the dividend consumed only about 24% of that free funds flow.

There is one fairly large asterisk. Whitecap’s average realized crude oil and condensate price was $127.82 per barrel during the quarter. I wouldn’t take one particularly friendly commodity quarter, multiply it by four and call that normal. Instead, stress it out. Cut quarterly free funds flow by 30% while leaving the dividend unchanged, and the payout rises to roughly 34%. Cut free funds flow in half, and it climbs to about 48%. Those simply show how much breathing room existed in the reported quarter.

November help

This is where Alberta’s planned announcement gets interesting. Whitecap owns assets across Western Canada, so a provincial royalty incentive won’t automatically improve the economics of everything in the portfolio. If the framework targets certain project types or regions, some Whitecap assets could benefit far more than others.

That’s why I’d wait for management to tell investors which projects qualify and what the returns look like after royalties, development spending and operating costs. Whitecap’s combination with Veren makes that distinction even more important. The company is bigger now, with more assets and more shares outstanding, so giant year-over-year production numbers can look impressive without telling shareholders what they’re getting per share.

I’d watch free funds flow per share and debt instead. Whitecap finished the quarter with about $2.5 billion of net debt. Strong cash generation gives management a chance to bring that number down before the next commodity downturn inevitably reminds everyone why energy stocks are cyclical. If November’s royalty changes encourage a spending spree instead, I’d want to know whether management is still protecting that balance-sheet progress.

What the monthly payout delivers

Whitecap confirmed a $0.06 monthly dividend, which works out to $0.73 annually. Trading at $18.33 recently, the indicated yield was about 4%. That gives a $10,000 investment about $397.63 of annual income, or roughly $33.14 per month. The $10.15 left over can remain cash.

COMPANYRECENT PRICENUMBER OF SHARESANNUAL DIVIDENDANNUAL TOTAL PAYOUTFREQUENCYTOTAL INVESTMENT
Whitecap$18.33545$0.7296$397.63Monthly$9,989.85

Monthly payments are convenient, especially for investors looking at Canadian dividend stocks. Even so, a commodity downturn can hit both the dividend outlook and the share price at exactly the same time. Inside a Tax-Free Savings Account (TFSA), I’d keep Whitecap as one part of a diversified energy allocation rather than turn the TFSA into an oil-price prediction machine.

At about 15.7 times trailing earnings, the shares also need a sensible commodity outlook. If investors are already expecting generous royalty incentives, some of that good news may be sitting in the price before November arrives.

Bottom line

Whitecap already generates enough cash to comfortably support its current dividend. If Alberta’s November royalty framework improves the returns on projects Whitecap already wanted to build, even better. The existing business should carry the investment. The government incentive can earn its way into the story once the details finally arrive.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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