Investing in the oil & gas sector can provide long-term investors with excellent returns. Of course, this space has seen big-time volatility in recent years. But one stock that’s made a very impressive move off of its Covid lows is Whitecap Resources (TSX:WCP).
Known for its relatively cheap valuation of only seven times earnings and its impressively high dividend yield of 6.4%, Whitecap Resources is a company that spans the value and income gamut for most investors. This is a company that’s continued to see strong growth, but is also in a volatile space, leading some to be cautious with this name.
Let’s dive into whether Whitecap represents a buy, sell, or hold at current levels.
Strong business model
Oil & gas companies may look very similar. On the surface, that’s largely because they are. Whether it’s production, drilling and exploration, or well management services, these business models are pretty homogenous. That leads to the reality that most companies are price-takers with little pricing power and alpha generation capabilities.
That said, Whitecap is slightly different from the average energy stock. The company acquires, develops, and holds interests primarily in natural gas properties in Western Canada. The company also produces light oil and has seen its revenue and profitability surge in recent years.
In fact, the company brought in nearly $1 billion in revenue from its natural gas and crude oil production in 20233, leading to net income of just under $300 billion. That’s an impressive margin for the producer, which has clearly found various efficiencies at its core properties relative to its peers.
Whitecap also boasts an impressive return on equity relative to the sector, allowing the company to exude cash and pay its impressive dividend yield.
Is Whitecap Resources a buy, sell, or hold?
In my view, Whitecap Resources is one of the best oil & gas plays to consider in this current market. The company’s share price has been on a steady incline higher, driven by fundamentals and an increasingly cheap multiple. I think there’s plenty of room for multiple expansion, particularly if energy prices remain elevated moving forward.
With a net debt-to-earnings before interest, taxes, depreciation, and amortization ratio of only 0.6 times, Whitecap is well-positioned to drive further synergies and acquisitions in the future. However, just holding its operations stagnant, this is a stock I’d want to own at current levels. Free cash flow is surging, currently averaging almost half of the company’s earnings before interest and taxes. That’s unusually high, making this stock an unusually easy pick for value investors looking for a stable passive-income stream.
