Published on April 3rd, 2023 by Aristofanis Papadatos
Whitecap Resources (SPGYF) has two appealing investment characteristics:
#1: It is offering an above average dividend yield of 4.4%, which is nearly triple the 1.6% yield of the S&P 500.
#2: It pays dividends monthly instead of quarterly.
Related: List of monthly dividend stocks
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The combination of an above average dividend yield and a monthly dividend render Whitecap Resources appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about Whitecap Resources.
Whitecap Resources is an oil and gas company that focuses on the acquisition, development, and production of oil and gas in Western Canada. The primary areas of focus of the development programs of the company are in Northern Alberta and British Columbia, Central Alberta, and Saskatchewan. Whitecap Resources is headquartered in Calgary, Canada.
Whitecap Resources has some attractive characteristics. First of all, its assets are characterized by low decline rates. This is paramount in the oil and gas industry, as many producers suffer from high natural decline rates.
Source: Investor Presentation
In addition, Whitecap Resources greatly benefits from the ample reserves of oil and gas in the areas in which the company is present. In 2022, the company grew its proved reserves per share by an impressive 49%. This admirable performance is in sharp contrast to that of most oil majors, which are struggling to replenish their reserves, let alone grow them.
As Whitecap Resources has a business focused on oil and gas, it has exhibited a highly volatile performance record due to the dramatic cycles of the prices of oil and gas. The company has incurred material losses in 4 of the last 10 years. Therefore, investors should carefully identify the part of the cycle that this business is in before investing in this stock.
Just like almost all the oil and gas producers, Whitecap Resources incurred excessive losses (-$3.55 per share) in 2020 due to the plunge of the prices of oil and natural gas caused by the pandemic. However, thanks to the massive distribution of vaccines worldwide, the global consumption of oil and gas recovered in 2021 and thus the company returned to high profitability in that year.
In early 2022, the onset of the war in Ukraine rendered the global oil and gas markets extremely tight. As a result, the prices of oil and natural gas skyrocketed to 13-year highs last year. That rally led oil and gas producers to post record profits last year. Notably, Whitecap Resources saw its earnings per share dip 15%, mostly due to increased capital expenses. Nevertheless, the company still posted its second-best earnings per share in a decade last year.
Whitecap Resources has a proved reserve lifetime of 13.2 years, which is above the average lifetime of about 10 years of the entire oil and gas industry. In addition, Whitecap Resources is growing its reserve base at a fast pace thanks to the favorable characteristics of its development areas.
Moreover, Whitecap Resources currently enjoys remarkably strong business momentum. In the fourth quarter of 2022, the company grew its production per share by 43% over the prior year’s quarter. Furthermore, management provided guidance for 13% growth of production per share in 2023.
Source: Investor Presentation
A double-digit production growth rate is extremely rare in the oil and gas industry. In fact, most oil majors, such as Exxon Mobil (XOM) and Shell (SHEL), have failed to grow their output for several years in a row. This is a key difference between Whitecap Resources and most oil and gas producers.
On the other hand, Whitecap Resources is sensitive to the cycles of the oil and gas industry. This is clearly reflected in the volatile performance record of the company. During the last eight years, Whitecap Resources has grown its earnings per share by only 2.1% per year on average and has posted losses in 4 of the 8 years.
Whitecap Resources currently enjoys strong business momentum, not only thanks to its high production growth, but also due to the Ukrainian crisis and the deep production cuts implemented by OPEC in an effort of the cartel to support the price of oil. The price of natural gas has plunged this year, primarily due to an abnormally warm winter, but the price of oil has remained above average. As a result, Whitecap Resources is likely to continue thriving this year.
Given the positive business momentum but also the cyclical nature of the business of Whitecap Resources and the high comparison base of last year, we expect approximately flat earnings per share in five years from now.
Dividend & Valuation Analysis
Whitecap Resources is currently offering an above average dividend yield of 4.4%, which is nearly triple the 1.6% yield of the S&P 500. The stock is thus an interesting candidate for income-oriented investors but the latter should be aware that the dividend is not safe due to the cyclical nature of the oil and gas industry.
Whitecap Resources currently has an exceptionally low payout ratio of 14% and a decent balance sheet, with net debt of $2.9 billion, which is only 62% of the market capitalization of the stock. As a result, the dividend of the stock has a margin of safety for the foreseeable future.
On the other hand, due to the cyclicality of the business of Whitecap Resources, its dividend is not entirely safe. In addition, U.S. investors should be aware that the dividend received from this stock depends on the exchange rate between the Canadian dollar and the USD.
In reference to the valuation, Whitecap Resources is currently trading for only 3.9 times its earnings per share in the last 12 months, primarily due to the above average earnings posted last year. We assume a fair price-to-earnings ratio of 5.0 for the stock. Therefore, the current earnings multiple is lower than our assumed fair price-to-earnings ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 5.3% annualized gain in its returns.
Taking into account the flat earnings per share, the 4.4% dividend yield and a 5.3% annualized expansion of valuation level, Whitecap Resources could offer an 8.6% average annual total return over the next five years. This is a decent expected return but we recommend waiting for a lower entry point in order to enhance the margin of safety and increase the expected return.
Whitecap Resources has much better prospects in growing its production and its reserves than most of its peers and is offering an above average dividend yield of 4.4%. Thanks to its healthy balance sheet, the company is not likely to cut its dividend in the near future. As a result, it is likely to entice some income-oriented investors.
However, the company has exhibited a highly volatile performance record due to the cycles of its business. Therefore, investors should wait for a more attractive entry point.
Moreover, Whitecap Resources is characterized by low trading volume. This means that it may be hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
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And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
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