A Member of Pat McKeough’s Inner Circle recently asked for his advice on an oil and gas production and exploration company that’s been on an acquisition spree in recent years.
Pat likes the increased production and cash flow as well as the 5.2% dividend yield. However, he notes that growth by acquisition can be risky despite the company’s focus on buying producers in the geographic areas it knows.
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Whitecap Resources Inc. (Symbol WCP on Toronto; www.wcap.ca) produces and explores for oil and natural gas in Western Canada. Oil makes up 74% of its daily output; the remaining 26% is gas.
Inner Circle: Established producers should help boost production and earnings
In January 2021, the company closed a deal to buy NAL Resources for $155 million in Whitecap stock. Then, in February 2021, it completed the purchase of TORC Oil & Gas for $900 million in Whitecap shares.
In May 2021, the company bought Kicking Horse Oil & Gas for $300 million. Subsequently, in July 2021, Whitecap closed on the purchase of Highrock Resources for $300 million, consisting of 3.6 million Whitecap common shares and $44.4 million in cash.
Most recently, in August, 2022, Whitecap completed the acquisition of XTO Energy Canada for cash of $1.7 billion.
The acquired assets are currently producing 32,000 barrels per day (30% oil) from the Duvernay and Montney formations in Northwest Alberta. They also include 672,000 acres of land containing over 20 years of tier-one drilling locations, and an operated gas processing facility as well as third-party Duvernay volumes.
The acquired assets generate significant cash flow, and production is expected to grow to 50,000 to 60,000 barrels per day over the next three to five years. This let Whitecap raise its monthly dividend by 22.3% with the July 2022 payment, to $0.0367 from $0.03. The shares now yield 5.2%.
Growth by acquisition adds risk, although Whitecap cuts that risk by buying established producers in areas where it already operates. The stock trades at just 3.8 times its forecast 2023 cash flow per share.
Recommendation in Pat’s Inner Circle: Whitecap Resources Inc.is a hold.
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