Whitecap Resources: Good FCF In Q4 2023, But Still Exposed To Weak Natural Gas Prices

seekingalpha02-22

Whitecap Resources released its Q4-23 result, showing a 6% increase in production compared to the previous quarter.The company generated a respectable funds flow of C$462M in Q4 and a good free cash ...

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The prior articles can be found here. I last covered Whitecap in conjunction with the Q3-23 result, when I sold the last of my holdings and downgraded the stock. The timing was fortunate, and the stock price has been punished since that time. My main concern with Whitecap was the relatively large capex guidance for 2024, which possibly played a part in the underperformance. The depressed natural gas price has likely been the main reason for the recent weakness, together with poor industry sentiment in general. Figure 1 - Koyfin Whitecap has since my last article made a small oil-weighted acquisition, which will boost production slightly in 2024. The company is now guiding for 165,000-170,000 boe/d of production, and we have also seen a C$100M decrease in the capex budget, which is very welcomed. The 2024 capex guidance is now C$900M-C$1,100M. Following the latest production guidance from Whitecap, the production growth story remains intact, both in absolute terms and on a per-share basis. Figure 2 - Quarterly Reports Yesterday, Whitecap released the Q4-23 and full-year 2023 results and will host a conference call later today. This article will primarily be focused on the Q4-23 result and my general views on the company. Q4-23 Result The Q4 production was 166,554 boe/d, which was a healthy 6% increase compared to 157,026 boe/d in the prior quarter. The company also bought back 8.6M shares in Q4, which boosted the production per share slightly more. Whitecap did last year indicate that production would grow more in the Q4, so the late boost in 2023 production was not a surprise. The annual 2023 production was 156,501 boe/d, just below the lower point of the 2023 guidance range. Figure 3 - Quarterly Reports Both oil & natural gas prices dropped off at the end of Q4. The price of oil has at least partly rebounded in 2024, while the slide in the natural gas price has worsened in 2024. With that said, the average oil price in Q4 was relatively good, which led to a healthy total realized price for Whitecap last quarter. Figure 4 - KoyfinFigure 5 - Quarterly Reports Whitecap did in Q4 generate a respectable funds flow of C$462M, which was a 1% decrease compared to the prior quarter. Free cash flow was, on the other hand, up substantially to C$262M compared to C$184M in the prior quarter. The funds flow per share came to C$0.77 in Q4, and adjusted free cash flow per share was C$0.44. So, the cash flow has covered the C$0.18 dividend per share and quarter by a decent margin. Figure 6 - Quarterly Reports The net debt has increased slightly quarter-over-quarter, likely due to the recent acquisition, buybacks, and some one-off items. With that said, the debt level should be very manageable for Whitecap given how much the company has deleveraged over the last year and the growth in production lately. Figure 7 - Quarterly ReportsFigure 8 - Quarterly Reports Whitecap continues to be a low-cost producer, which managed to generate an adjusted netback of C$33.9/boe in Q4. That is a solid number when we consider how weak natural gas prices were and the fact that 35% of Q4-23 production was natural gas, naturally significantly less on the revenues side, as illustrated by the figure below. Figure 9 - Quarterly Reports Valuation & Conclusion The upward revised production guidance and lowered capex guidance have improved the 2024 valuation slightly for Whitecap. The company is with the latest share price of C$9.16 trading with a free cash flow yield of 11% using the market cap and latest strip prices. With enterprise value, the free cash flow yield is 9%. This is not a particularly expensive valuation and the dividend yield of 8.0%, with monthly distributions, is a nice feature of Whitecap. With that said, there are quite a few peers that are trading with free cash flow yields closer to 15%, using the market cap, which also offers high shareholder distributions. So, while I do think Whitecap is likely to do relatively well given the depressed sentiment among Canadian oil & natural gas companies, I remain neutral on Whitecap on a relative basis and prefer more oil-weighted peers with even cheaper near-term valuations. Figure 10 - Whitecap February 2024 Presentation Whitecap might deserve a premium valuation due to its good operating history and ability to generate per-share growth in production, funds flow, and free cash flow. For me, the premium is still a little bit too large, despite the underperformance in the stock over the last few months together with some improved guidance figures.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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