“They’re struggling to say, ‘We’ve got all this cash, what do we do with it?’” said Rafi Tahmazian, director and senior portfolio manager at Canoe Financial, noting that he’s expecting companies to continue buying back their own stock, even after the broader energy rally, because the energy sector is “puking out cash.”
Rising commodity prices have lifted Canadian oil and gas stocks. The S&P/TSX Composite Index is up 69 per cent so far this year and that performance has more than tripled the rise in the S&P/TSX Composite Index, which is up 20 per cent over the same time period.
Suncor Energy Inc. reports quarterly results Wednesday and is the only large Canadian oil producer that has underperformed the energy index, but is still up 31 per cent this year to $28.04 per share. The stock has been weighed down by operational problems after the company hit an aquifer at its Fort Hills oil sands mine.
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In the second quarter, Suncor distributed the bulk of its $958-million in shareholder returns by buying back its own shares, spending $643 million to buy up stocks compared with $315 million in dividends. Analysts expect share buybacks to continue for Suncor.
“The stock has been a relative laggard for over a year now, reflected in the now consistent trading discount to peers,” Citi analyst Prashant Rao wrote in an Oct. 19 research note.
Tahmazian said he expects to see more companies implement or boost dividends as they have hit, or are close to hitting, their debt-reduction targets for the year.
Even high-flying CNRL is trading at the same value-to-earnings ratio, of roughly three-times earnings, as it was before both oil and natural gas prices doubled, Tahmazian said. “It’s at one of the cheapest values it’s been at in 30 years.”
CNRL, which overtook Suncor Energy Inc. to become the most valuable Canadian oil company last year, declined to comment on whether it would change its capital deployment strategy, citing its upcoming third-quarter earnings call Nov. 4.
Most analysts expect share buybacks to continue.
“We view the purchase and cancellation of shares in the market as an appropriate component of its capital deployment, as this element does drive (net asset value) growth per share whereas elevated cash distributions do not,” Robert Fitzmartyn, analyst with Stifel FirstEnergy, wrote in a research note.
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Fitzmartyn expects oil and gas companies in Canada to generate $21 billion in cash flow in excess of expenses over the course of next year, given the current outlook for oil and gas commodity prices. He said that money would be divided into a few “buckets,” including debt reduction, share buybacks, dividends and special dividends.
Eight Capital analyst Phil Skolnick said he expects smaller- and mid-sized oil and gas companies to implement share buybacks and possibly boost dividends given the “tailwinds” of rising commodity prices and lower debt levels, which translate to lower corporate breakeven costs.
Skolnick said he expected Tamarack Valley Energy Ltd., a mid-sized Calgary-based oil producer, to unveil a new capital allocation strategy during its earnings call this week, and the company is likely to implement a dividend in the near future.
PrairieSky Royalty Ltd.’s net earnings rose 258 per cent to $33.7 million in the third quarter, up from $9.4 million during the same period a year earlier. The company also declared a nine cent per share dividend on Monday, up 38 per cent from 6.5 cents per share in the second quarter.