Energy firms favouring buybacks over drilling new wells

Canadian oil and gas stocks are so cheap that companies are better off buying back their own shares than drilling new wells, according to money managers. Calgary-based Canadian Natural Resources Ltd. became the latest in a string of domestic oil companies to announce plans for a share buyback after markets closed Wednesday, when the company filed for a normal course issuer bid indicating plans to repurchase five per cent of its float. If Canadian Natural follows through with the bid, and management indicated on the last earnings call that they would, it would mark the first time that Canada’s largest producer has repurchased its own shares since the oil downturn began in 2014. Other Calgary-based producers Suncor Energy Inc., Imperial Oil Ltd., Prairie Sky Royalty Ltd. and a few oilfield services companies such as Trican Well Service Ltd. have announced plans to repurchase their own stock, underscoring confidence in their company’s prospects. “I suspect this could be a trend,” GMP First-Energy analyst Michael Dunn said, citing “depressed equity prices, not being rewarded for organic growth and pipeline egress issues.”

“If you can’t get your oil to market, then why don’t you buy back shares instead of drilling wells?” Dunn said, referring to the fact that Canada’s oil export pipelines are all full. Ninepoint Partners senior portfolio manager Eric Nuttall said he and other fund managers have been urging Canadian oil and gas companies to allocate their free cash — the money they generate after paying for expenses — to share buybacks rather than growth since the middle of last year. He said oil and gas shares are undervalued and have not rallied alongside oil prices, creating a disconnect between the value of the producers and the product they pump out of the earth.

The S&P/TSX Capped Energy Index has fallen 11.3 per cent year-to-date, trailing the broader TSX index, which is down 3.4 per cent.

Data from Baker Hughes shows there are 273 rigs working in Canada, a 13-per-cent drop from the 315 rigs drilling at this time last year.