WHY ENERGY DIVIDENDS AREN’T DONE YET.

Savings boost free cash flow for producers

CA LGA RY • Major Canadian oil producers have cut deeply into their costs and at least one analyst now expects dividends to grow even if oil prices continue to languish, possibly leading to a shareprice rebound.

Citi Research analyst Fernando Valle said in an interview Thursday that he upgraded Suncor Energy Inc. and Husky Energy Inc. on the expectation that they could grow, and in Husky’s case reinstate, their dividends even at oil prices of US$55 per barrel.

In a note, Valle said he expected companies like Suncor, Husky and Cenovus

Energy Inc. to update their sustaining cost numbers in the near future, as Imperial

Oil Ltd. recently did. The new cost numbers should show the majors are in a “sweet spot” in terms of their ability to generate free cash flow and they could sustain and grow their dividend payments at oil prices of US$55 per barrel.

“The market does not yet seem to capture the significant deflation in sustaining capital across the oilsands that will result in a meaningful increase in (free cash flow) potential,” Valle said. “This should allow the sector to deliver real dividend growth to shareholders.”

He noted that Imperial Oil lowered its estimates for sustaining capital — the money it needs to fund its operations — by 40 per cent and added “the remainder of the group should announce similar reductions.”

Dinara Millington, vicepresident of research at the Canadian Energy Research Institute, said costs have come down in the oilsands since the oil price rout began in 2014. “On the op-ex side it’s been significant, but on the capital expenditures side … not so much,” she said.

Kevin Birn, senior director with IHS Markit, said oilsands companies have seen a nine-per-cent capital cost reduction and steam- based projects have seen a “quite dramatic” 40-per-cent reduction in operating expenditures since the beginning of the oil price rout. He said break-even costs for oilsands firms have dropped by about $10 per barrel.

While Valle expects cash flow numbers to improve over time, he still expects headwinds for major Calgary energy companies who begin reporting third-quarter results next week.

“On the upstream side, it’s still not going to be a great quarter,” he said

Arthur Grayfer at CIBC World Markets said in a research note this week that he expects cash flow numbers to rise across the Canadian large-cap energy players by an average of 22 per cent when they announce their results.

For the integrated companies like Suncor, Husky and Imperial, he expects cash flow per share to jump an average of 34 per cent, with Imperial Oil leading the way.

Oil prices dropped slightly over the course of the third quarter, which would normally cause a drag on oil and gas companies’ earnings.

However, many analysts expect major oilsands players in Canada to rebound from an especially tough second quarter, when many were forced to suspend production because of the threat of the raging forest fire near Fort McMurray, Alta.

BMO Capital Markets analysts, for example, are expecting large oilsands producers to post a 34-per-cent increase in production in the third quarter, compared with the quarter before, along with a boost in cash flow.

SIGNIFICANT DEFLATION IN SUSTAINING CAPITAL.

ERIC HEALEY / POSTMEDIA NETWORK Husky could reinstate its dividends even at oil prices of US$55 per barrel, analysts say.