Oilpatch favours growth over dividends, despite investors’ pressure

Companies may need strategy change to keep up with U.S. rivals, analyst says

CALGARY

Canadian energy companies are struggling to attract investment while their U.S. rivals are having an easier time raising money. Analysts at Barclays Capital have a simple solution for the Canadian oilpatch: Change your strategy.

In a new report entitled “If you can’t win, change the game,” Barclays Research analyst Grant Hofer said mid-cap Canadian oil and gas producers do not offer the growth opportunities their U.S. competitors enjoy and, as a result, can’t attract the same amount of capital.

“Acknowledging that Canadian mid-cap energy companies are struggling to compete for investor interest, we believe that a shift away from growth could be helpful for some companies,” Hofer said.

The Calgary-based analyst’s report suggests a handful of companies — especially Crescent Point Energy Corp., Obsidian Energy Ltd. and Bonavista Energy Corp. — should spend more of their free cash flow on dividend payments to shareholders and less on drilling for new growth.

Hofer said that Canadian oil companies could thereby attract more capital from investors looking for yield by transitioning into an income-focused investment vehicle.

Hofer’s report contrasts the growth-focused company model, followed in investment hot spots such as the Permian light oil formation in Texas, and the incomefocused model followed by companies in more mature formations such as the North Sea or even the oilsands.

Growth-focused oil producers spend the majority — in some cases all — of their free cash flow drilling new wells to boost their overall production.

Income-focused oil producers shift much of that spending toward distributions to shareholders, either through dividend payments or share buybacks.

While executives throughout the oilpatch acknowledge investment has moved in recent years to the U.S., where companies enjoy a less restrictive regulatory and tax regime, they expect strong growth opportunities in Canada, too.

Many local oil companies either cut or reduced their dividends following the dramatic collapse in oil prices that began in 2014. They have also resisted calls to reinstate or raise their dividends while commodity prices continue to be volatile.

Scott Saxberg, Crescent Point’s president and CEO, said the Barclays report underestimates the size of the company’s drilling inventory, which has more than doubled over the past three years.

“Our strategy over the last three years has been to stay within cash flow and not grow as much in this US$45 low-price environment and we’ve focused on new play development,” Saxberg said. As a result, he said, the company would continue to focus on growth.

“When oil prices do turn and move upward, we will spend more capital and grow our production per share,” Saxberg said. “We think the guys that are growing their production on the gas side at $1 (per gigajoule) AECO (price) or oil at US$45 (per barrel), doesn’t make a lot of sense.”