Canada's oil patch leads shareholder payout boom in energy
North American oil and gas producers are swimming in record levels of free cash flow as the price of oil climbs, and companies keep a tight lid on spending due to COVID-19. That "meteoric rise" translated to more rewards for shareholders in the third quarter, according to Evaluate Energy, especially in Canada's oil patch.
A group of 84 Canadian and U.S. producers tracked by the London-based industry data provider raked in a combined US$32.5 billion in operating revenue in the third quarter of this year, the highest level recorded since 2018. At the same time, Evaluate Energy found flat capital spending of around 55 per cent of operating cash flow was a "major factor" keeping producers flush.
Free cash flow - the difference between funds from operations and capital expenditures - reached a record $19.1 billion for the companies tracked in the report. That's more than $8 billion higher than the previous record total from last quarter. It also dwarfs the pre-pandemic average of $1.7 billion between 2018 and Q1 2020, Evaluate Energy said in research released on Thursday.
"Producers have made clear their desire over the past few months to return as much free cash flow as possible to shareholders," senior oil and gas analyst Mark Young wrote in the report. "Should cash flow outpace board or regulatorily-approved plans, the vast majority of producers plan to direct excess cash towards strengthening balance sheets."
Young found producers in Canada's oil sands put the lowest portion of operating cash into capital spending, dropping below 25 per cent in Q3. They were also the only group to commit over 15 per cent of total cash outlay towards shareholder returns.
Eric Nuttall, senior portfolio manager at Toronto-based Ninepoint Partners, and a staunch advocate of investment in Canada's energy sector, also expects the payouts to continue as oil marches higher and balance sheets grow stronger. He manages the firm's roughly $860 million Canada-focused energy fund.
"It's only going to get better, not only as the oil price goes up, but as balance sheets get paid down more and more and more," he said at a recent virtual event. "I want 50 per cent of your free cash flow for my unit holders. We've been through a tough time. [For] seven years, they've been the worst bear market in history. They need to get paid."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
https://ca.finance.yahoo.com/news/canadas-oil-patch-leads-shareholder-payout-boom-in-energy-report-132929781.html