RE:New NCIB to be announced?highalpha1 wrote: Management has clearly laid out the game plan for how excess free cash flow will be utilized in 2021 -- 2/3 will go towards debt and 1/3 will go toward share buybacks. Management has reiteration this allocation strategy over and over again, including during its Q1 conference call and its Investor's Day presentation.
The current NCIB was to buyback up to 44 million shares. As per their 2020 Q4 earnings statement (released on February 3, 2021): "Subsequent to the end of the quarter, the TSX accaepted a notice to commence NCIB for up to 44,000,000 common shares." During Q2 earnings call, the CEO explicitly stated that SU had exercised the NCIB by buying back 20 million shares from January to April 2021. I also know that SU has been buying loads of shares in May and June.
I would imagine by the time Q2 earnings are released on Wednesday, SU would be close to buying back 44 million shares this year (or at least very close to that number). Management has not expecting the amount of free cash flow that they are seeing. Back in late 2020, management was projecting between $1.5-$2.5 billion in free cash flow (of which $1.0-$1.5 billion was to go towards debt and $0.5-$1.0 billion was to go to share buybacks). Well, in Q1 alone, SU realized $1.4 billion in excess cash flow (beyond operating expenses and dividend payment). Even with production levels lower for Q2, higher oil prices will likely mean that even more money was made in Q2.
I am wondering how SU will spend that excess free cash flow. I would imagine they will announce a new NCIB, or, maybe raising the dividend. I fully understand that management has said a dividend hike should not be expected until 2022, but I think from the numbers that I am analyzing, there is sufficient FCF to hike the dividend immdiately (to at least C$0.26/quarter).
Nice analysis
Here is my take
SU will do another NCIB to cover the at least the rest of this year up to the maximum allowed by the regulators and will continue to pay down what debt that they can reasonably pay down subject to the agreements with their bankers. They will not raise the dividend until probably at least Q1 next year.
Why do I say this?
1....it is consistent with their previous guidance and they would be reluctant to change it since any change would raise questions as to why there was a change and whatever they said in response would just raise more questions - so it is better not to get into that corner
2....buybacks now at a clearly cheap price for the shares is plain and simple a good investment decision by management. Buybacks are a one-time cost/use of funds which makes all future earnings per share higher than they would be without it and this would be reflected in the share price at some time. A dividend increase is not a one-time thing and so they need to be careful about raising the dividend to make sure it is sustainable and they don't have to reduce it back again at some later point and lose credibility.
3...delaying a dividend increase gives time for more data regarding a post COVID world and whether the recent agreement by OPEC+ actually sticks. In a couple of quarters the answers to these questions will be a lot clearer.