Despite investor pressure, Canadian oilpatch favours growth over dividends

CALGARY – Canadian energy companies struggle to attract investment while competing U.S. producers have an easier time raising money, so analysts at Barclays Capital are calling on domestic producers to change their strategy.

In a research report this week entitled “If you can’t win, change the game,” Barclays Research analyst Grant Hofer said mid-cap Canadian oil and gas producers do not offer the growth opportunities their American competitors enjoy and, as a result, can’t attract the same amount of capital.

“Acknowledging that Canadian mid-cap energy companies are struggling to compete for investor interest, we believe that a shift away from growth could be helpful for some companies,” Hofer said.

The Calgary-based analyst’s report suggests a handful of companies – especially Crescent Point Energy Corp., Obsidian Energy Ltd. and Bonavista Energy Corp. – should spend more of their free cash flow on dividend payments to shareholders and less on drilling for new growth. Hofer said that Canadian oil companies could thereby attract more capital from investors looking for yield by transitioning into an income-focused investment vehicle.

Hofer’s report contrasts the growth-focused company model, followed in investment hotspots such as the Permian light oil formation in Texas, and the income-focused model followed by companies in more mature formations such as the North Sea or even the oilsands.

Growth-focused oil producers spend the majority – in some cases all – of their free cash flow drilling new wells to boost their overall production. Income-focused oil producers shift much of that spending toward distributions to shareholders, either through dividend payments or share buybacks.

While executives throughout the oilpatch acknowledge investments has moved in recent year to the U.S., where companies enjoy a less restrictive regulatory and tax regime, they expect strong growth opportunities in Canada, too.

Many oil companies either cut or reduced their dividends following the dramatic collapse in oil prices that began in 2014. They have also resisted calls to re-instate or raise their dividends while commodity prices continue to be volatile.

Crescent Point president and CEO Scott Saxberg said the Barclays report underestimates the size of the company’s drilling inventory, which has more than doubled over the past three years.

“Our strategy over the last three years has been to stay within cash flow and not grow as much in this US$45 low-price environment and we’ve focused on new play development,” Saxberg said. As a result, he said, the company would continue to focus on growth.

“When oil prices do turn and move upward, we will spend more capital and grow our production per share,” Saxberg said. “We think the guys that are growing their production on the gas side at $1 (per gigajoule) AECO (price) or oil at US$45 (per barrel), doesn’t make a lot of sense.”

Other companies are also resisting the call to hike dividends to attract more income-focused investors.

“Obsidian Energy intends to use available cash flow to invest in our asset base, which has powerful development optionality both inside the Cardium, the backbone of the company, and amongst our Deep Basin, Peace River and Alberta Viking assets,” according to Brad Monaco, Obsidian Energy’s manager, corporate planning and investor relations.

Bonavista Energy, the third company Barclays said would benefit most from switching to a dividend-focused strategy, did not respond to a request for comment.

John Brussa, an energy and tax lawyer who sits on the boards of multiple oil and gas producers, said a blanket approach in the sector would not work. “It depends on your asset base,” he said.

Some companies, like Cardinal Energy Ltd., which payout “pretty hefty dividends” because the wells allow for it. Some companies, in newer parts of the Western Canadian Sedimentary Basin, are better suited to focus on growth.

Financial Post

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