Even though the small Canadian oil and gas company Whitecap Resources (OTCPK:SPGYF) may almost blend into the background of their industry, one aspect that stands out is their dividend yield that currently exceeds 6%. On the surface, it almost sounds unbelievable that a small oil and gas company with such a high dividend yield could have well-covered dividend payments. Unfortunately, this desirable aspect is counteracted by a weak financial position.
When assessing dividend coverage, I prefer to forgo using earnings per share and use free cash flow instead, since dividends are paid from cash and not from “earnings”. The graph included below summarizes Whitecap’s cash flows from the last three years:
Image Source: Author
When reviewing the graph included above, their great dividend coverage is easily apparent, with it ranging from a low of 142.35% to a high of 217.27%. This indicates that they have no issues organically funding their dividend payments across multiple consecutive years, which is exactly what any investor should wish to observe.
It is also worthwhile considering that to be generous, all of their expenditure towards acquisitions was ignored when calculating their free cash flow. Whilst ignoring inorganic expenditure of this nature is fairly common when assessing dividend sustainability, the frequency in which it occurs in this situation creates a grey zone whereby a case could be made for its inclusion. During the same time period analyzed, their net acquisitions totaled a substantial $1.031b, which significantly outstripped their free cash flow. Naturally, if these expenditures were also included, their dividend coverage would quickly turn negative; however, I believe this would paint an unfair picture, although going forward, this should be an area that is closely monitored.
Even though their dividend coverage has been strong, the financial position still forms an instrumental component in determining whether the current dividend payment is sustainable. The two graphs included below summarize the financial position from the last three years:
Image Source: Author
Unfortunately, it appears as though their financial position is the main weakness, and even though a gearing ratio of 26.74% is quite decent and healthy, their other metrics are rather concerning. The two most concerning metrics are their current ratio of only 0.68 and, to an even greater extent, the interest coverage of only 2.73. When these are combined with the non-existent cash balance, it indicates that not only is the liquidity weak but the company’s ability to service their current debt is also stressed.
Admittedly their situation is not quite as serious as for many other small oil and gas companies since they consistently produce ample free cash flow. This means that provided oil and gas prices avoid a prolonged downturn, they should not require additional debt. Although oil and gas prices are notoriously volatile and difficult to predict, a strong financial position is very important to ensure the company can maintain their dividend payments through the tough times.
The bottom line is that provided oil and gas prices at least stay around their current levels, then there are few reasons to doubt the sustainability of the company’s dividend payments. The primary risks arise from the fact that no one can guarantee that this will occur, and thus if an investor is after income, they should look elsewhere as the risks are too high.
Notes: Unless specified otherwise, all figures in this article were taken from Whitecap Resources’ Quarterly Reports, and all calculated figures were performed by the author.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.