$70 crude a threat to dry up Canada oil firms’ dividends
The ability of Canadian oil producers to attract investors with generous dividends is being tested as cash flow is squeezed by crude trading near five-year lows.
Companies are having to choose between reducing spending or payments to shareholders, said Sprott Asset Management LP’s Eric Nuttall.
For example, Canadian Oil Sands Ltd. will cut its quarterly dividend 42 percent to 20 cents per share in late January, the Calgary-based company said in a 2015 budget forecast statement Wednesday after the close of North American markets.
“The true sustainability of the dividend model at current oil prices in Canada is highly challenged,” said Nuttall, who oversees $106 million at Sprott’s Toronto office. He predicted capital spending will fall 15 percent next year and dividend reductions may follow if prices stay low. “The current oil price does not work for the industry.”
Canadian energy companies, such as Baytex Energy Corp. with average dividend levels higher than their U.S. peers, are facing tough choices after oil fell as much as 40 percent from its high in June. The plunge accelerated in late November after OPEC committed to maintaining its current output target despite a supply glut and a global battle for market share.
Canadian producers in the Standard & Poor’s/TSX energy index have a dividend yield of 3.59 percent, 35 percent more than the average of the U.S. companies in the S&P 500 Energy Index as of Wednesday, according to data compiled by Bloomberg. The yield, which measures annual per-share dividends relative to a company’s share price, is rising for many producers as their stocks fall.
Dividend yields approaching 10 percent are a “strong signal that the market fears their sustainability,” said Robert Mark, director of research at MacDougall, MacDougall & MacTier Inc. in Toronto, which manages about $5.3 billion.
At Tuesday’s close, Baytex yield was 12.8 percent, Canadian Oil Sands was at 10.5 percent, Penn West Petroleum Ltd. yielded 14.9 percent and Crescent Point Energy Corp. was at 9.4 percent.
Nuttall said the pain should ease for producers if West Texas Intermediate, the U.S. benchmark, rises above $75 per barrel next year, as he expects.
Some companies are also partially shielded from oil’s slide after locking in future prices with hedging. Crescent Point had 37 percent of its 2015 output secured at prices above $81 per barrel as of Oct. 28, the company said in its third-quarter earnings statement.
“This is a great investment opportunity for people to collect a pretty high yield on a low-risk company,” which has never lowered its dividend through six downturns in the price of oil, Crescent Point Chief Executive Officer Scott Saxberg said. “Our hedging program keeps our cash flow strong and allows us to maintain our dividend, maintain our capital program and battle through this.”
Penn West will maintain its dividend if it’s pressured by persistent low oil prices by reducing its 2015 capital spending, spokesman Greg Moffatt said in an email.
“Depending on the extent and duration of commodity price weakness in 2015, we can adjust our capital plan as required in the second half of the year,” Moffatt said.
Siren Fisekci, a spokesman for Canadian Oil Sands, declined to comment in advance of the company’s budget announcement. Andrea Beblow, a spokesman for Baytex, also declined to comment.
“Cutting a dividend tends to be in the later stages of what you do,” said Craig Bethune, a fund manager who focuses on energy and natural resources investments for Manulife Asset Management Ltd. “Some will continue to fund their dividends through the tough times, choosing to make asset dispositions, really anything but cut the dividend.”
Reducing dividend yields would free up extra cash for development at Baytex, said Mark Friesen, an analyst at RBC Dominion Securities Inc. in Calgary.
“Balance sheet preservation is paramount and it will be important to see evidence of this in the company’s 2015 capital guidance,” Friesen said Tuesday. Information for this story was contributed by Eric Lam of Bloomberg News.