Watch List: Whitecap Resources (WCP.TO) Update

[dan_s]

I plan to take a hard look at Whitecap in July. HFI now lists WCP as one of their Top Picks.

HFI Research: Whitecap Resources (WCP:CA) has emerged from its acquisition of Veren as a premier large-cap North American E&P.

The combined entity features a current production capacity of 365,000 boe/d, with production comprised of 54% light crude oil, 11% NGLs, and 35% natural gas. The greater scale and operating synergies brought forth by the combination will enhance the combined entity’s drilling economics and capital efficiencies.

After the combination, Whitecap’s acreage possesses a deeper core liquids drilling inventory than any Canadian E&P peer outside of the oil sands, with considerably more than 20 years of high-quality inventory. The depth of Whitecap’s inventory exceeds that of every independent public Permian E&P. Only Diamondback (FANG) comes close to matching Whitecap’s inventory depth.

Whitecap intends to grow its production by 3% to 5% per year, with production growth driven by legacy Veren’s liquid-rich Montney acreage. I expect its production to increase to more than 450,000 boe/d over the next five years, at which point it will still have decades of high-quality drilling inventory.

Whitecap has consistently built value for its shareholders, and I expect that to continue. Its management’s long-term track record of value creation is among the best among Canadian energy companies.

The chart below presents some important value metrics. Management’s record is particularly impressive considering how difficult macro oil and natural gas market conditions have been throughout long stretches of time during this period.

The combined entity’s stock will be more desirable to large equity investors interested in a multi-year holding period than either Whitecap or Veren were on a standalone basis. The standalone entities had been stuck in the no-man’s land of Canadian E&P mid-caps in recent years. They traded at a perpetual discount to larger North American peers, irrespective of their underlying economics or growth prospects. I expect that to change with the combined entity as larger investors appreciate the wider implications of the end of U.S. shale growth and seek a reliable means of oil exposure.

The discount on Whitecap shares provides an attractive entry point for long-term investors. As the company’s strengths are borne out over the coming quarters in its operating and financial results, I expect investors to embrace the combined entity and bid its shares to a sustained higher multiple.