Energy Summary for Oct. 28, 2021
2021-10-28 20:17 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for December delivery added 15 cents to $82.81 on the New York Merc, while Brent for December lost 26 cents to $84.32 (all figures in this para U.S.). Western Canadian Select traded at a discount of $15.50 to WTI, up from a discount of $15.75. Natural gas for December lost 42 cents to $5.78. The TSX energy index added 7.15 points to close at 162.88.
That was decisive. A year and half after unexpectedly slashing its dividend by 55 per cent, Suncor Energy Inc. (SU), up $3.78 to $32.00 on 32.2 million shares, has just as abruptly increased it by 100 per cent. It will now pay a quarterly dividend of 42 cents instead of 21 cents, for a yield of 5.2 per cent.
The move is either long overdue (to hear some investors talk) or should never have been necessary in the first place (to hear others). Suncor came under widespread criticism in May, 2020, after cutting what was then a 46.5-cent quarterly dividend to just 21 cents. "[We want] to drive down the cash break-even of the company to a WTI price of $35 (U.S.) per barrel," insisted president and chief executive officer Mark Little at the time. To investors who watched rival producers such as Canadian Natural Resources Ltd. (CNQ: $52.94) and Imperial Oil Ltd. (IMO: $45.10) leave their dividends intact, Suncor's logic was cold comfort. Over time, it led to heated frustration, as WTI rocketed well beyond $35 (U.S.), the above two rivals and others began increasing their dividends, and Suncor -- and its share price -- lagged stubbornly behind.
Even now, the new 42-cent dividend is not as high as pre-COVID levels, and Suncor has far from fully regained investors' favour. Yet they certainly liked the dividend update and the quarterly financials that accompanied it. In the third quarter, Suncor took in cash flow of $2.6-billion or $1.79 a share, slightly exceeding analysts' predictions of $1.76 a share. Production of 698,000 barrels a day matched predictions. Suncor repaid a full $2-billion worth of debt during the quarter, and expects to reach what was previously a 2025 debt goal in 2021 instead.
Despite niggling concerns about high gas prices (which are a negative for gas-guzzling Suncor, and indeed helped send its year-over-year operating costs to $2.7-billion from $2.1-billion), the financials were generally well received. TD Securities analyst Menno Hulshof predicted in a research note this morning that the numbers "should wake the market up to the resilience of [Suncor's] business model." He hiked his price target to $40 from $39. Credit Suisse's Manav Gupta left his target at $36 for now, but said he expects "very strong" results to continue. He added that Suncor's dividend hike may put pressure on Cenovus Energy Inc. (CVE: $14.60) to do the same. (Cenovus suspended its 6.25-cent quarterly dividend in 2020 and then brought it back at just 1.75 cents in early 2021. The yield is 0.5 per cent.)
In other dividend news, Brian Schmidt's Alberta- and Saskatchewan-focused Tamarack Valley Energy Ltd. (TVE) added nine cents to $3.67 on 7.98 million shares, after promising to introduce a monthly dividend this February. The news came as little surprise to investors. Last month, Tamarack unveiled a five-year plan -- more of a scattered wish list full of dreams and possibilities -- that talked vaguely of a "potential return of capital" in 2022. It also talked of acquisitions, share buybacks, debt reduction, internal production boosts and so on. Investors mostly ignored it, sending the stock up just one cent to $2.72 on the day of the plan's release, but as rumours solidified around a dividend, the stock raced higher. Today's close of $3.67 is the stock's highest level since mid-2018.
This is not to say that Tamarack has dropped its habit of vagueness. Although it has pinned down a timeline for a dividend, it is still sorting out the base amount, which it intends to link to its debt levels, cash flow and general market conditions. It reckoned that its first dividend will be about four-fifths of a penny (0.83 cent). This implies a yield of 2.7 per cent. Tamarack emphasized that this dividend is just one item on the menu for shareholders, who may also enjoy special dividends and "tactical" share buybacks.
As with Suncor, Tamarack's dividend news was accompanied by its third quarter financials. These were generally better than analysts had expected, showing cash flow of 25 cents a share (above analysts' predictions of 24 cents a share) and production of 41,300 barrels of oil equivalent a day (well above predictions of 38,800 barrels a day). Yet the muddy dividend messaging held back some analysts from what would normally be spasms of adulation. Some were obligingly enthusiastic, such as Raymond James analyst Jeremy McCrea, who hiked his price target to $5.75 from $5.50 and kept a "strong buy" rating. By contrast, Canaccord Genuity's Anthony Petrucci nudged his price target only to $4 from $3.75 and left his rating at "hold."
A couple of other Western Canadian oil companies had quarterly financials worth a mention. Grant Fagerheim's Whitecap Resources Inc. (WCP) lost 11 cents to $7.50 on 11 million shares, despite releasing financials that were slightly better than expected. Production averaged 115,900 barrels of oil equivalent a day (analysts were expecting 114,600) and cash flow came to 46 cents a share (analysts were expecting 45). Whitecap's stock seemed to be taking a breather after spending the last nine weeks racing up to nearly $8 from about $5. In light of the above, it should be no surprise that this period included a dividend update: Whitecap hiked its monthly dividend on Oct. 14 to 2.25 cents from 1.625 cents, for a new yield of 3.6 per cent.
(Incidentally, Whitecap's financials provided an example of why energy investors often focus on cash flow rather than net profit or loss, particularly in times of price volatility. A sharp drop in commodity prices may cause companies to record hefty asset impairments, which are recorded as expenses and can drag net losses into the billions. A sharp increase in prices can cause the opposite as impairments are reversed. In the case of Whitecap's financials, a sizable impairment reversal gave rise to a purported net profit of $1.5-billion -- double the actual revenue of $728-million.)
We end today's roundup with Craig Bryksa's Crescent Point Energy Corp. (CPG), up 14 cents to $6.20 on 18.9 million shares. Its financials this morning showed production of 132,200 barrels a day and cash flow of 67 cents a share for the third quarter, mostly in line with analysts' predictions of 129,800 barrels a day and 67 cents a share. Shareholders nodded in approval. At $6.20, Crescent Point's stock has added nearly $2 since it jumped early on the dividend-hiking bandwagon last month. It was trading at $4.30 before unveiling a three-cent quarterly dividend on Sept. 10 (for a current yield of 1.9 per cent). President and CEO Mr. Bryksa emphasized today that he wants to "increase such returns over time."
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