BMO Remains Whitecap Resources Bull After Business Update

The Candian TSX-listed oil and gas company Whitecap Resources Inc WCP SPGYF announced Monday that it will take a "more cautious approach" to manage costs and improve its balance sheet.

The Analyst

BMO Capital Markets analyst Ray Kwan maintained an Outperform rating on Whitecap Resources with a price target lowered from CA$7 ($5.26) to CA$6 ($4.51). 

The Thesis

Whitecap said it plans on reducing capital expenditures in the back half of 2019 by 17%, which should bring total 2019 capital expenditures to $400 million, or $50 million less than prior guidance.

The company's move to reduce capital and maximize free cash flow is the "right decision," Kwan said in a Monday note. (See his track record here.)

The analyst named the following takeaways from the company's plan:

• The dividend payout can be sustained so long as WTI oil trades at $45 per barrel or above.
• Average production guidance for 2019 remains unchanged at 70,000-72,000boe/d but exit fourth quarter production guidance was lowered from 77,000boe/d to 74,000-75,000boe/d.
• Free cash flow post-dividend for 2019 is estimated by Kwan to be $124 million, which implies an all-in payout ratio of 81%. 2020's all-in payout ratio is modeled at 96%.
• Separately, the company said it fixed $200 million of bank debt at an interest rate of 3.25% per year for the next five years. Whitecap's total net debt currently stands at $1.2 billion out of a total debt capacity of $1.77 billion.

Price Action

Over-the-counter Whitecap Resources shares were down 3.57% at $2.60 at the time of publication. 

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