Whitecap Resources Inc.

Whitecap Resources Inc.(TSX: WCP) is a Canada based company which operates in the exploration and production of oil and natural gas. The Group receives the majority of its revenue from crude oil segment, while a part of the revenue is being derived from NGLs and Natural gas.

The Company announced a quarterly dividend of CAD 0.01425 per common share, payable on July 15, 2020.

Q1FY20 Financial Highlights: Whitecap Resources released its quarterly results, wherein the Company reported total revenue and other income of CAD 430.39 million, significantly higher from CAD 184.21 million in the previous corresponding period (pcp). The exuberant growth was primarily driven by a net gain on commodity contracts amounting CAD 169.17 million against a net loss of on commodity contracts amounting to CAD 111.36 million in pcp. However, the Company derived a total revenue of CAD 264.3 million from petroleum and natural gas, indicating a 23% y-o-y decrease on account of lower commodity prices. Total expenses increased to CAD 3,211.87 million, as compared to CAD 253.16, primarily attributable to inclusion of impairment charges amounting CAD 2,924.28 million in pcp. Stock-based compensation, interest and financing and depletion, depreciation, & amortization expense stood relatively higher than the previous corresponding quarter while lower blending, general & administrative and exploration and evaluation costs were relatively lower. Net loss and other comprehensive loss widened to CAD 2,111.47 million, as compared to CAD 52.56 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s top line is directly related to crude oil prices. Any volatility in crude oil prices would affect the company’s performance. The company has significant exposure in commodity risk management contracts, which might result in losses in case of drastic market volatility.

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of WCP corrected ~58% so far this year, due to a drastic fall in the crude oil prices on account of demand destruction scenario due to COVID 19 restrictions. However, in the recent past, we have seen a demand improvement due to opening up of several economies and the sector is witnessing a gradual recovery in demand, which is a key positive. Meanwhile, the stock of WCP soared ~62% in the last three months, outperforming the index by ~36%. We expect stable oil prices to support the realized revenue and as well the royalty income in the coming quarters. Further to preserve the liquidity, the group lowered its FY20 capital expenditure program at the range of CAD 200 million to CAD 210 million, from earlier projected CAD 350 million to CAD 370 million. The group is also focusing on cost reduction measures and targeting a cost savings of CAD 42 million in operating expenses. The group’s G&A cost per boe is the lowest in the sector when compared to oil-weighted peers. At the last traded price, the stock is offering a dividend yield of ~7.5% on an annualized basis, which is lucrative amid the low interest rate environment. We have valued the stock using Price/CF based relative valuation approach and considered industry (energy) median on NTM basis and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current price of CAD 2.29 as on July 02, 2020.

WCP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Enerplus Corporation

Enerplus Corporation (TSX: ERF) produces and develops crude oil and natural gas assets across Canada and the United States. The company has its oil production units at the Williston and Waterfloods basins, while the Marcellus provides a significant portion of natural gas production.

The Group declared a monthly cash dividend of CAD 0.01 per share, payable on July 15, 2020.

Q1FY20 Financial Highlights: Enerplus Corporation declared its quarterly results, wherein the Company posted a significantly higher revenue of CAD 359.46 million, as compared to CAD 202.58 million in the previous corresponding period. The increase was driven by a remarkable gain from commodity derivative instruments amounting to CAD 131.34 million against a loss of CAD 84.86 million in Q1FY19. During the first quarter, ERF reported production of 98,209 BOE per day, including liquids of 54,390 barrels per day, up 11% over Q1FY19. ERF reported lower revenue from Oil and natural gas sales, net of royalties, despite an 11% y-o-y increase in total production. Realized price fell significantly, primarily attributable to an overall lower demand owing to COVID-19 pandemic. Net Income stood significantly lower at CAD 2.87 million, as compared to CAD 19.15 million in Q1FY19 due to a higher depletion & depreciation expense coupled with an increase in operating and transportation expenses.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: Income and profitability of the group are directly correlated with the crude oil prices. Volatility in oil prices and demand might impact the price realization and sales volume of the Company, which would take a toll on the top-line and bottom-line. 

Valuation Methodology: EV to EBITDA Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of ERF corrected ~58% so far this year, due to a drastic correction in the crude oil prices which has resulted in bearish investor sentiment on the sector. On account of the price recoveries in the international crude oil prices, the stock recovered from the recent lows and delivered a strong return of ~84% in the last three months. To support the Company’s overall liquidity and working capital requirements, the Management took prudent steps and reduced the capital budget by ~45%, to ~CAD 300 million. The group lowered its cost structure through operational efficiency, vendor service cost reductions, project deferrals and lower cash compensation for the Management and staffs, which is likely to cushion the cash flows. The group has maintained low financial leverage as its net debt to adjusted funds flow standing at 0.8x. The group has a solid hedging position and expects hedging gain of CAD 150 million in 2020. The group has achieved an 11% reduction in well costs in North Dakota. The group is expecting a lower run-rate cost driven by workflow improvement and the implementation of other cost control measures. We expect the Company’s financials would be benefitted from improved crude oil prices due to resumption in manufacturing and industrial activities across the globe. The stock carries a dividend yield of ~3.02%, which is decent amidst the current interest rate scenario. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like ARC Resources Ltd, Crescent Point Energy Corp and Baytex Energy Corp etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 3.97 as on July 2, 2020.

ERF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.