Stock to watch: Low-cost producer Whitecap joins the dividend club

The Globe and Mail

-In this Tuesday, March 6, 2012, file photo taken with a long exposure, a pumping unit sucks oil from the ground near Greensburg, Kan.

(Charlie Riedel/AP)

Whitecap Resources Inc.

Wednesday’s close: $8.36, down 52 cents

52-week trading range: $5.79 - $10.77

Annual dividend: None until 2013

Analysts’ ratings: There are 17 buys and 1 hold, according to Bloomberg data.

Recent history: It’s been a roller-coaster ride this year for shares of the energy company founded in 2009 by its chief executive officer Grant Fagerheim. The oil patch veteran formerly headed companies like Cadence Energy Ltd., which was sold to Barrick Gold Corp., and Ketch Energy Ltd., taken over by Acclaim Energy Trust. Shares of Whitecap, which went public in 2010 through a reverse takeover of Spitfire Energy Ltd., are flat so far this year. They have rebounded since plunging to a 52-week low in June as the price of oil tumbled to $80 (U.S.) a barrel. Whitecap began considering a dividend strategy in February as the price of oil surged to $110 a barrel.

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Outlook: Whitecap, which has jumped from the ranks of a junior to an intermediate light oil producer, announced late Tuesday that it was joining the club of energy dividend payers. Next year, it will begin paying 5 cents per share monthly, or 60 cents annually, for expected yield of about 6.8 per cent. Market expectations of a dividend were priced in the shares, which fell nearly 6 per cent on Wednesday.

“Management was a bit more conservative than what the Street expected,” said Alex Sasso, chief executive officer of Hesperian Capital Management Ltd., which holds Whitecap in several funds. “I think...it was hoping the dividend would be better than the peer group average of about 7 per cent.”

Still, Whitecap is attractive because it has strong netbacks [operating cash margin for every barrel sold] and a clean balance sheet, Mr. Sasso said. “They have 850 low-risk, light oil locations, employ a strong hedging program, and is a low-cost producer. These factors make it an ideal dividend-and-growth type company.”

The company has a lot of infill locations - wells to be drilled between established producing wells - that will be “low-hanging fruit for them,” he noted. “They have taken a lot of the risk out of that play for them.”

Shares of Whitecap are “good value relative to other distribution-paying companies in the oil patch,” he suggested. Its payout ratio, including capital spending, will be 95 per cent versus about 125 per cent for peers.

“With the bonus of a proven management team and track record of growing production, that is what we like about it,” he said. “The big risk is the oil price...Oil prices can go down, but as long as they still pay you a distribution, you are going to get 7 per cent. In a weak oil environment, this stock will hold value than just a pure exploration company.”

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Companies & investments Mentioned In This Article (1)

Company Price Change Volume
Whitecap Resources
WCP-T
18.30 -0.974 % 1,367,400