Whitecap Resources Inc

Whitecap Resources Inc (TSX: WCP) is a Canada-based oil and gas company. The Company is engaged in the business of acquiring, developing, and holding interests in petroleum and natural gas properties and assets. It is focused on acquiring sustainable assets with Discovered Petroleum Initially In Place (DPIIP) and low current recovery factors and moving them through the development chain by converting contingent resources, probable reserves, producing reserves (cash flow).

Key Highlights

• Strong Margin of Safety: The group’s LTM Free Cash Flow Yield stood at 15.5%, which is gigantically high and provide strong margin of safety to its existing as well as potential shareholders. Further, the group’s free cash flow yield is significantly higher than the peer’s average LTM Free Cash Flow Yield of 7.4%.
• Generating Higher Return on Shareholder Money: LTM Return on Equity (ROE) of the company stood at 26.7% compared to the industry average of 23.4% and peer’s median of 2.9%, which implies that the WCP shareholders are having strong competitive advantage over the competition.
• Trading at a Discounted Valuation: From the TTM Price to Cash Flow standpoint, the company’s shares are trading at a multiple of 4.36x, whereas peer’s average TTM P/CF multiple stood at 7.42x, which implies a valuation discount of approximately 41%.
• An Income Play: At the last closing price, WCP shares were offering a decent dividend yield of 3.98%, which is significantly higher given the lower interest rate environment. Further, the company has strong track record of continuous dividend payment over the past one decade.

Financial Highlights: Q2FY21

Source: Company Filings

• Second quarter production of 116,799 boe/d compared to 70,807 boe/d in the prior year quarter, which represents an increase of 65% on an absolute basis and 9% per share.
• Whitecap generated funds flow of CAD 267 million in the second quarter, or CAD 0.43 per share, compared to CAD 0.19 per share in the prior year quarter and CAD 0.36 per share in the first quarter of 2021.
• Further, after capex the group generated CAD 227 million of free funds flow during the second quarter.
• Net debt of CAD 1.4 billion on total credit capacity of CAD 2.0 billion results in significant financial flexibility with approximately CAD 0.6 billion of unused capacity.

Valuation Methodology (Illustrative): Price to Cash Flow

Risk Associated to Investment: The company’s financials could be significantly impacted by lower offtake of crude oil in wake of resurgence in Delta variant cases. Also, a sharp fall in the oil prices would have a drag on the company’s financials. Other risk factors are ranging from Supply chain disruption, lower production, forex risk and credit risks as well.

Stock Recommendation:  The company has strong financial health, and strong financial risk protection metrices with EBITDA to interest ratio at 20.6x. After capex, the group generated a free cash flow of CAD 227 million during the second quarter of the fiscal 2021. Further, with increased of vaccination would reduce severe impacts on demand as we witnessed in the last year. Moreover, the company is offering a decent dividend yield at the current price level, which is quite decent amid a lower interest rate environment and continuation in dividend payment is largely protected in future given the availability of the strong free cash flow with the company. Hence, based on the aforementioned rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 4.89 on August 20, 2021.

1-Year Price Chart (as on August 20, 2021). Source: Refinitiv, Analysis by Kalkine Group 

Secure Energy Services Inc

Secure Energy Services Inc (TSX: SES) is a Canada-based energy services company. The Company provides customer solutions to upstream oil and natural gas companies operating in western Canada and certain regions in the United States. The Company's segment includes Midstream Infrastructure and Environmental and Fluid Management.

Key Highlights

• Solid Q2FY21 Performance: Topline grew by 78% on a YoY basis to CAD 116.70 million, driven by 41% increase in the Midstream Infrastructure segment revenue and Oil purchase and resale revenue, which increased 75%. Further, Environmental and Fluid Management segment revenue for the three months ended June 30, 2021, increased 118%.
• Strategic All-Share Amalgamation of Tervita Corporation: The key benefits of the Transaction include highly complementary midstream infrastructure asset bases and environmental service lines provide for enhanced scale, utilization, efficiencies, and expanded services for the combined company's customers, and immediately accretive to cash flow from operations and discretionary free cash flow per share for all shareholders of the combined company.
• Reduced Debt Position: During the quarter under consideration the group generated discretionary free cash flow of CAD 19.5 million, which was used primarily to repay debt, as well as fund the Corporation's quarterly dividend, capital program and costs associated with the Transaction. Net cash flows from operating activities were CAD 20.8 million in the quarter.

Financial Highlights: Q2FY20

Source: Company Filing

• Revenue jumped by 78% to CAD 116.70 million in the second quarter of fiscal 2021, on a YoY basis.
• Adjusted EBITDA of CAD 30.0 million increased 47% from the three months ended June 30, 2020, primarily as a result of higher period over period revenue as described above.
• Net loss attributable to shareholders of SECURE was CAD 14.9 million for the three months ended June 30, 2021, compared to a net loss of CAD 20.9 million for the corresponding 2020 comparative period.
• The Corporation generated cash flows from operating activities of CAD 20.8 million for the three months ended June 30, 2021, a decrease of 6% from the prior year comparative period.
• During the three months ended June 30, 2021, the Corporation declared dividends of CAD 1.2 million to holders of common shares.

Risk Associated to Investment:  A plunge in oil prices make oil exploration unviable for upstream companies which would also hit demand offtake of oil equipment. Also, given the higher Debt/Equity ratio of the company at the end of June quarter, balance sheet risk is slightly high.

Stock Recommendation: The company reported decent performance in the second quarter of FY21, with strong topline growth, bolstered balance sheet, deleveraged balance sheet and exited the quarter with a free cash flow of CAD 19.5 million, which was used primarily to repay debt, as well as fund the Corporation's quarterly dividend, capital program and costs associated with the Transaction. Further, higher and more stable crude pricing drove a rebound in activity levels in the Western Canadian Sedimentary Basin, evidenced by an increase in the active rig count of over 250% from the prior year comparative period. On the valuation front, the stock is available at forward EV to Sales Multiple of 2.0x compared to the industry mean of 2.7x. Therefore, based on the above rationale, we recommend a “Hold” recommendation at the closing price of CAD 3.95 on August 20, 2021.

1-Year Price Chart (as on August 20, 2021). Source: Refinitiv, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.