RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:A fine quarter , a little timing difference in cash flowPer Eight Capital note below...
Free cash flow looks robust: Specifically amongst oil-weighted companies at STRIP, we estimate in 2024 on average a 11% FCF Yield amongst the Senior E&P, Oil Sands & Integrateds, a 23% FCF Yield amongst oil-weighted domestic E&Ps and a 30% FCF Yield amongst oil-weighted Internationals/Multinationals on STRIP. On average, we estimate FCF yields increasing by 6% YoY for our entire coverage universe. Standouts include: 1) BTE, GTE, PXT, ROK, SOIL, TAL, and TCF see FCF yields increasing by more than 10% YoY; and 2) ATH, BIR, CVE, IPO, and TVE see FCF Yields increasing by more than 5% YoY
.
Not surprisingly, overall, the debt picture also looks positive for the majority of the companies we cover: On average, net debt to cash flow (ND/CF) across our universe is under 1.0x in 2023 and further decreases to 0.5x in 2024 on STRIP. This supports our view that balance sheets are strong and the sector is in great shape to pull the lever on growing shareholder returns, accelerating incremental organic growth for the SMID-caps, and acting on M&A opportunities. We highlight that in 2024: 1) GPRK, SOIL, SU, and TCF sink below 1.0x ND/CF; 2) CVE, IPO, and ROK reach net surplus territory; and 3) ATH, IMO, KEL, PXT, and TAL continue growing net cash balances.
More free cash flow and strong balance sheets mean more upside for shareholders, in our view: However, when it comes to the allocation of that FCF, not everything is equal. Select companies we cover are committed to delivering on an NCIB and further leverage reduction, and while still positive and accretive for equity shareholders, it limits optionality for production growth, dividend growth and capacity for M&A. In Figure 1, we highlight the companies estimated to generate the most excess free cash flow after dividends, NCIBs, and meeting debt obligations (excess FCF), which we see as providing the most capability to offer differentiation and dividend upside next year on STRIP.
To this end, we believe the most attractive peer group is the oil-weighted SMID-cap E&P space. Amongst growth oriented companies: 1) ROK sees the highest estimated 2024 excess FCF yield of 25% and generating $24 million of excess cash which is ~65% of our estimated 2024 capital program; 2) KEL generates $80 million of FCF, which is a 6% yield and we highlight that the company tends to match capex with estimated cash inflows. Amongst dividend payers: 3) BTE generates almost $800 million of excess FCF which equates to a 15% yield after paying $78 million in dividends and assuming a $395 million NCIB and 4) IPO generates almost an estimated $40 million of excess FCF, which is unencumbered by debt targets, and implies a 16% yield on top of the company's current dividend.
Amongst dividend paying companies, we see room for raises on STRIP: Amongst the Seniors, both CVE and IMO screen the best and could support up to a 50% dividend raise while keeping a ~50% capex + dividend payout ratio and only paying out 19% - 23% of their respective excess FCF. We expect CNQ to continue with its raises. In the SMID-cap E&P space, we see BTE and IPO having the capacity to increase dividends/pay a special dividend, with BTE being able to increase its dividend by 50% without materially impacting its payout ratio and excess FCF. We note that client feedback suggests that SMIDcaps should focus on growth as opposed to dividend yields.
Year-end 2023 and 2024 see next wave of increasing shareholder return commitments on STRIP: In Figure 6, we highlight that CVE and MEG hit their next net debt targets in Q4/23, and move to paying out 100% of FCF to share buybacks while CNQ and SGY meet net debt targets in Q4/24 and Q3/24 paying out 50% to buybacks/dividends/growth and 100% to share buybacks, respectively. We also note that companies whose NCIBs can have a meaningful effect on their stock price due to the size their respective floats and FCF are CVE, GTE, IMO, IPO and TAL (Figure 7).