(Idea) Strathcona Resources - Strong Q4 Strengthens The Bull Case
By: Jon Costello
Strathcona Resources (SCR:CA) reported fourth-quarter 2024 results earlier today. At first glance, the performance appeared weak. The company produced 187,203 boe/d, just above analyst expectations of approximately 185,000 boe/d, but its oil production came in 3% below expectations at 144,500 boe/d. Meanwhile, its natural gas production of 256 mmcf/d outperformed expectations by 13%. We don’t own SCR for natural gas exposure, so the gassier-than-expected production was not a welcome sight.
Free cash flow per share also came in light during the quarter, at $1.89, versus expectations of $2.00, for a 5.5% miss.
Fortunately, a deeper dive revealed that all was well. Oil production was lower than expectations because the company built an inventory of heavy oil as adverse weather conditions caused congestion at rail hubs, preventing shipments. SCR ended up selling the inventory shortly after year-end. It didn’t disclose the quantity of this inventory, but I suspect if it was sold as expected in the fourth quarter, SCR’s oil production would have met expectations. SCR’s lagged oil sales were also a factor in its lower-than-expected free cash flow per share.
SCR’s natural gas production outperformance was also not an issue. After natural gas prices improved, the company returned previously shut-in volumes at its Groundbirch asset.
One positive note was a 4% dividend increase. At an annualized $1.04, SCR stock trades at a 4.2% dividend yield with its stock at $25.
SCR’s extra oil sales in 2025 have boosted year-to-date production to 195,000 boe/d, well above management’s full-year guidance of 190,000 boe/d. While we expect production to come down slightly over the course of the year, we expect SCR to outperform its production guidance. If it does, its production beats will create a tailwind for its share price.
Management took measures during the fourth quarter to increase the trading liquidity of SCR’s stock. The company executed a share pass-through transaction that reduced the Waterous Energy Fund’s ownership from 90.8% of common shares outstanding to 79.6%. The shares were also transferred into public hands, increasing the trading liquidity. Despite the increase, however, SCR shares remain pitifully illiquid. I’ve been using the recent gaps down—due in part to the lack of liquidity amid widespread investor fear—to buy more shares.
Shareholders should be pleased that SCR prepared for the impact of U.S. tariffs. In the fourth quarter, the company hedged the WTI-WCS differential for 53% of the production it expects to sell in Western Canadian markets in 2025 at $12.93 per barrel. The WTI-WCS differential recently rose above $16 per barrel, so the move is already paying off. SCR also hedged the WTI-WCS Houston differential for 70% of the production it expects to sell in the U.S. Gulf Coast between April and September of this year.
Capital expenditures were high in 2024, at $1.3 billion. Management is guiding to a higher capex of $1.35 billion in 2025. Capex was high because half of the total is being spent on non-drilling-related activities, the largest of which are facilities and pipeline expenditures. These expenditures are necessary to accommodate future production growth. They’ll be key in increasing SCR’s operating leverage and free cash flow as it boosts production in the 2027-2030 timeframe.