DIV­I­DEND WE FALL

The oil price crash has caused div­i­dends – one of the surest signs of fi­nan­cial strength – to plum­met in the en­ergy sec­tor

Alberta Venture - - The Briefing -

>>> From the mid-2000s up to the 2008 fi­nan­cial cri­sis, en­ergy stocks were div­i­dend su­per­stars. To­day, they’re in some (very shal­low) uncharted wa­ters. Take Cres­cent Point En­ergy. CEO SCOTT SAXBERG told BNN in March that, “His­tor­i­cally, we’ve never cut the div­i­dend – we’ve grown it three times since 2008 and we’re in a very good po­si­tion fi­nan­cially to main­tain that div­i­dend through this year.” Flash for­ward to Au­gust when Saxberg an­nounced that Cres­cent Point will cut said div­i­dend 57 per cent.

To­day, just 38 per cent of the 63 com­pa­nies on the S&P/TSX Com­pos­ite en­ergy in­dex have pos­i­tive free cash flow – down from 43 per cent in 2013 – and by the end of Q2 2015, 23 per cent of them had re­duced their div­i­dend. That’s enough to scare away even some of the in­vestors who’ve been de­ter­mined to hold through the down­turn.

Still, div­i­dend cuts aren’t un­ex­pected when oil plunges. And while it makes sense to pro­tect “the long-term value of [share­hold­ers’] in­vest­ment,” as Siren Fisekci of Cana­dian Oil Sands said, what if cut­ting the div­i­dend won’t ac­tu­ally ac­com­plish this? As Al­berta Oil mag­a­zine re­cently re­ported, “Bay­tex En­ergy, which elim­i­nated its div­i­dend com­pletely … will only see its debt-to-cash flow ra­tio drop from 12.6 to 11 at $40 oil – an im­prove­ment, cer­tainly, but not one that will have a ma­te­rial im­pact on the com­pany’s abil­ity to en­dure low prices.”

While share prices fluc­tu­ate with any num­ber of fac­tors, div­i­dends are a rel­a­tively un­fil­tered look at how the econ­omy is di­rectly im­pact­ing com­pa­nies. “We think it was the right de­ci­sion to pro­tect our bal­ance sheet,” Saxberg said af­ter an­nounc­ing the cut. “We know prices will re­turn, and we will be well po­si­tioned when they do.” In the mean­time, how­ever, some in­vestors – par­tic­u­larly those who un­der­took div­i­dend in­vest­ing as an al­ter­na­tive to higher-tax GICs and bonds, or who count on them for smaller marginal tax rates than in­ter­est and em­ploy­ment in­come – will up and leave.

“[Cut­ting the div­i­dend] is just the right de­ci­sion to pro­tect our bal­ance sheet, and it po­si­tions us for when prices turn.”

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