TD Notes RoC Commitments to Exceed Limits of Base Divi & NCIB for Some
Which operators may need to pull additional ROC levers?
TD Investment Conclusion
The potential return-of-capital propositions are becoming increasingly complicated and increasingly difficult to compare across companies. In this note, we provide a summary of the mechanisms that each E&P under coverage intends to use to return capital to shareholders.
Based on our forecast of significant FCF generation across the sector under current strip pricing assumptions, we believe many E&P will reach the regulatory ceiling on NCIB programs and may require additional levers to meet their return-of- capital commitments. It is likely, in our view, that these incremental levers will result in additional cash being returned directly to equity — we expect that there could be looming announcements regarding incremental base and potentially additional variable/special dividends.
Key Takeaways
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Nearly every E&P under coverage is currently returning some prescribed portion of FCF to shareholders through a combination of base dividends, variable/special dividends, NCIBs and SIBs. We estimate that E&Ps under coverage will return an average of ~37% of 2022E FCF and ~44% of 2023E FCF to equity holders.
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There are a couple of companies which are yet to announce formulaic strategies; however, we anticipate that a return-of-capital framework may be imminent for Crescent Point (CPG-T), and looming for Spartan Delta (SDE-T). We will likely view these future announcements positively; however, for purposes of this report, we are focusing on those companies with previously articulated frameworks that may look to pull incremental levers (beyond current base dividends and maximized NCIBs) in order to return the committed amounts of FCF back to equity holders.
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In our view, under strip pricing, many E&Ps may be required to provide enhancements to their current return-of-capital frameworks in order to fulfill their payout targets — either through increased base dividends, declaring additional special/variable dividends and/or possibly SIBs.
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Among the conventional E&Ps, we believe Advantage (AAV-T), Baytex (BTE- T), ARC (ARX-T), Enerplus (ERF-T), and NuVista (NVA-T) are most likely to return incremental cash to equity holders in order to meet their shareholder-return commitments. We have singled out these entities as the amount of cash under their RoC commitments exceed their current base dividends and the current cost of repurchasing 10% of their shares outstanding per annum. This group could potentially see 3-16% of the current market cap returned to shareholders in the form of yet-to-be-announced cash base/variable/special dividend increases under a strip pricing scenario.
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In the Integrated space, we specifically highlight that Cenovus (CVE-T) has the potential to return 23% of the current market cap in 2023, given its commitment to return 100% of FCF when net debt hits $4bln (we estimate late-2022 now, given strong refining margins). This is followed by Suncor (SU-T) at nearly 20%. Both companies could see material cash dividend increases based on our analysis.