Whitecap Resources Inc

Whitecap Resources Inc (TSX: WCP) focuses on the acquisition, development, optimization, and production of crude oil and natural gas in western Canada. 

Key Highlights:

• Strong Surge in production: In Q1FY21, the group reported higher production of 95,828 boe/day, as compared to 73,452 boe/day in Q1FY20, representing a growth of 30% on y-o-y basis supported by strategically improved production from the Natural gas segment. Notably, Natural gas represents ~22% of the total production in Q1FY21, climbed from ~16% in pcp. Crude oil and NGLs depicted 68% and 10% of the total production, respectively. The above growth is supported by higher demand for petroleum and crude oil products in the recent past, aided by the gradual recovery in the demand due to the reopening of the economy.

• Encouraging Outlook: For FY21, the group expects its total production at 108,000 boe/day, significantly higher than the 68,662 boe/day in FY20. Global oil demand has remained elevated in the recent past and is anticipated to return to pre-pandemic levels by early 2022, which would eventually overtake the total supply. This is a key positive for the company, as it is highly poised to utilize the upcoming opportunities arising from the sector.

Q1FY21 Financial Highlights:

• WCP announced its quarterly result, wherein the company posted total revenue and other income of CAD 328.245 million, lower than CAD 430.399 million in the previous corresponding period (pcp). The decline was primarily due to a loss of CAD 78.190 million from commodity contracts, as compared to a gain of CAD 169.173 million in pcp.
• Total expenses stood at CAD 298.005 million, significantly lower than CAD 3,211.874 million in pcp, due to inclusion of impairment costs amounting to CAD 2,924.275 million in pcp. However, the quarter witnessed a surge in operating expense, marketing and transportation costs.
• The group reported a net income of CAD 19.635 million, as compared to a net loss of CAD 2,111.474 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s revenue is correlated to the price of oil and gas. Any volatility in oil & gas prices or change in demand dynamics would affect the group’s performance.

Valuation Methodology (Illustrative): Price to Cash Flow  

Stock Recommendation:

The stock of WCP carries a dividend yield of ~2.8%, which is decent considering the current interest rate scenario. The Company has liquidity of CAD 1.405 billion, which seems to be sufficient to fund the upcoming operations. As the vaccine roll out continues across the globe, we expect the demand for oil & gas to improve, which is positive for the group. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered the industry (Energy) median on the next twelve months basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 6.38 on June 21, 2021.

1-Year Price Chat (as on June 21, 2021), Analysis by Kalkine Group

Secure Energy Services Inc.

Secure Energy Services Inc (TSX: SES) provides treatments and disposal services to the oil and gas industry. Fluid and solutions are provided through an integrated service and product offering that includes midstream services, environmental services, systems and products for drilling, production and completion fluids, and other specialized services and products. Through the processing, recovery, and disposal division, Secure delivers processing, storing, shipping, and marketing of crude oil, and oilfield waste disposal and recycling.

Key Highlights

• Secure Energy Services Inc. and Tervita Corporation Announce Receipt of Final Court Order Approving the Arrangement in respect of the proposed acquisition by SECURE of all the issued and outstanding common shares of Tervita by way of a plan of arrangement under the Business Corporations Act (Alberta) as previously announced on March 9, 2021.
• Integration of both the company would create strong pro forma financial position with attractive discretionary free cash flow generation expected to reduce debt and help achieve the combined company's target debt to EBITDA ratio of less than 2.5x, which is expected to be achieved within two years of closing.
• Further, combination would significantly improve cost structure to serve a growing and consolidating customer base through the full business cycle.
• Despite recent fall in the stock, SES shares are still trading well above the crucial long-term support levels of 200-day SMAs.

Technical Price Chart (as on June 21, 2021), Analysis by Kalkine Group

• In the first quarter of FY21, the company Generated discretionary free cash flow of CAD 27.5 million, which was used primarily to repay debt, as well as fund the Corporation's quarterly dividend, maintenance, and capital program. Net cash flows from operating activities were CAD 24.6 million in the quarter.

Financial Highlights: Q1FY21     

• Adjusted EBITDA decreased 7% to CAD 39.2 million during the three months ended March 31, 2021, from the 2020 comparative period. The impact of a 23% reduction to revenue (excluding oil purchase and resale) was partially offset by cost reductions taken since the first quarter of 2020 to reduce operating and G&A expenses to adjust the Corporation's cost structure to levels consistent with activity levels.
• Net loss attributable to shareholders was CAD 0 .6 million during the three months ended March 31, 2021, compared to a net loss of CAD 22 .0 million for the 2020 comparative period. The variance was primarily a result of expenses recorded by the Corporation in the prior year comparative period associated with the sudden onset of the economic downturn in March 2020.
• The Corporation generated cash flows from operating activities of CAD 24 .6 million during the three months ended March 31, 2021, a decrease of 46% from the prior year comparative period.

Risk: The group’s operations are dependent on the performance of oil & gas industry. Volatility in commodity prices or change in demand dynamics would weigh on the group’s financials. 

Stock Recommendation: The company is having 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. Further, integration of the recent acquisition would create strong pro forma financial position with attractive discretionary free cash flow generation, which is expected to reduce debt and help achieve the combined company's target debt to EBITDA ratio of less than 2.5x. Therefore, based on the above facts, we recommend a “Hold” rating on the stock at the closing price of CAD 4.44 on June 21, 2021.

One-Year Technical Price Chart (as on June 21, 2021). Analysis by Kalkine Group

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

Disclaimer

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