Oilpatch eyes $110B in dividends, buybacks
But plenty of headwinds could spoil outlook
Prairiesky Royalty Ltd. kicked off oilpatch’s earnings season with what seems like tone-setting results: A 38 per cent dividend increase.
The company’s liquids production and cash flow in the second quarter were modestly lower than analyst expectations, but the company acquired additional Clearwater royalty acreage for $155 million, a sign that the Calgary-based company felt confident enough to boost production in the future.
The expectation is that more dividend announcements and investment news is coming down the pipe as the oilpatch’s second quarter results kick off in earnest.
Peters & Co. recently noted that the North American (mostly from Canada) producers it tracks could potentially allocate $110 billion to dividends and buybacks cumulatively from 2021 to 2025 while still maintaining an average debt-to-cash flow ratio of around 0.5 times, even as it embarks on mergers and acquisitions.
“A number of operators have already come out with higher spending programs (mostly intermediate/junior producers) and shareholder return initiatives (dividend increases and variable/special dividends),” the Calgary-based investment broker said in a report. “However, with the continued strength in commodity prices and E&P cash flow, and debt paydown happening more quickly, we expect updated commentary on this to be the most dominant theme through reporting.”
The investment firm expects Western Canada Select to average around $68 in 2021 and 2022 (in Canadian dollars).
However, cost inflation is also rearing its head. Alberta’s power prices are expected to hit their highest levels since 2000, with prices at $99 megawatts per hour in the third quarter. Some producers also reported higher prices for steel and other raw materials.
“We have been incorporating rising costs in our estimates in late-2021 and 2022 (average range of 5-15 per cent increase year-on-year in 2022),” Peters noted. “To the extent that select operators are able to continue reducing costs through M&A and/or more efficient capital programs, this will be a differentiator and should present upside to estimates.”
MEG Energy Corp., the first major oilsands operator to announce its second quarter results, saw net earnings of $67 million in the second quarter, compared to an $80 million loss during the same period last year. The company also revised its 2021 average production to 91,000 to 93,000 bpd, from its previous guidance of 88,000 to 90,000 bpd. The Calgary-based operator also said it will redeem $125 million in debt and sell a noncore asset for $44 million.
The company also plans to boost its capex $335 million, from $260 million, with majority being deployed to bring production back up to 100,000 bpd at its Christina Lake facility.
Precision Drilling Corp., the oilfield services company, also reported strong demand for its rigs, especially in Canada.
“The outlook for the overall Canadian market over the next 12 months remains exceptionally bright,” Precision’s CEO Kevin Neveu said in a statement.
The company’s net loss jumped to $75.9 million during the second quarter, compared to a $48.8 million loss during the same period last year, but revenues rose during the period, and the company pointed to strong growth in its key markets of Canada, U.S., and a few international markets.
“Canada in particular remains a bright spot as activity is outpacing both 2019 and 2020 levels, and a tightening heavy rig market is creating opportunities for PD to move rigs into the WCSB (Western Canada Sedimentary Basin) from the U.S.,” wrote Cole Pereira, analyst at Stifel Firstenergy. “PD is currently running 52 rigs in Canada, with line of sight to get to upper 50s by late 3Q21e and potentially higher into 4Q21e.”
Natural gas producers are also expected to benefit from higher demand, especially as high temperatures boost demand.
“Bull case for AECO continues to build,” Denis Fong, CIBC analyst noted in a second-quarter preview report. “With internal and export demand outstripping supply, we have been highlighting for months that natural gas storage injections are insufficient to drive higher natural gas storage levels.”
Apart from regulatory issues, the industry has a number of challenges that could reverse growth, though.
Oil prices have rallied this year, but discord between OPEC members has made some analysts uneasy, with more barrels expected to hit the market under a new compromise between Saudi Arabia and the UAE.
Indeed, some analysts are predicting a short-term dip.
“Do not fight the constructive correction,” wrote Michael Tran, analyst at RBC Capital Markets. “Wait for the flush-out to run its course.”
But Scotiabank analyst Jason Bouvier believes the risk of sanctioned Iranian barrels returning to market sooner than expected as well as the spread of COVID-19 variants will likely put a near-term cap on oil prices.
“In addition, continued OPEC+ cooperation is required to keep the market in balance given the material amount of available capacity.”
Another temporary headwinds are extreme temperatures in Western Canada that could have an affect on production. However, it may turn out to be more of an earnings driver in the third quarter.
The second quarter will also see major Canadian producers report lower production in the second quarter compared to the first quarter, which could crimp earnings. Canadian Natural Resources Ltd., Suncor Energy Inc., and Imperial Oil Ltd. are expected to post around 9-10 per cent lower production each in the second quarter, according to Peters & Co. estimates.
Scotiabank, meanwhile, believes it will be a difficult quarter for refiners.
“Downstream utilization was impacted by planned turnarounds and weak demand for refined products due to COVID lockdowns. Notably, SU has moved a major turnaround at the baseplant from Q2/21 to Q3/21,” Scotia analysts noted. “Further, U.S. refining assets faced escalating RINS (Renewable identification numbers) costs. Consequently, we expect Q2/21 downstream cash flows to be below Q1/21 levels.”
Among major producers, Suncor Energy Inc. and Crescent Point Energy Corp. will release their results on Wednesday, with TC Energy Corp., Calfrac Well Services Ltd. and Whitecap Resources Inc. results out on Thursday. Enbridge Inc. and Imperial Oil Ltd. announce their results on Friday. Canadian Natural Resources Ltd. and Pembina Pipeline Corp. results will be released Aug. 5.