‘Pragmatism over pride’: Suncor no longer a dividend aristocrat — and others may follow suit

CALGARY — After posting a $3.5-billion net loss Wednesday and cutting its previously untouchable dividend, Suncor Energy Inc. warned more challenging times for the energy industry are ahead and predicted a prolonged recovery in oil markets.

“There’s absolutely no question that the second quarter will be far more challenging than the first quarter, both in the upstream and downstream sides of the business,” Suncor president and CEO Mark Little said on an earnings call Wednesday as the company posted a huge net loss for the first three months of the year and cut its quarterly dividend by 55 per cent to 21 cents per share.

Little said the company expects oil markets to “substantially recover” by 2022, but a period of economic uncertainty could persist thereafter and lead to “weaker commodity prices and higher volatility.”

Suncor, Canada’s largest oil producer by market capitalization, is considered among the most stable operators in the domestic energy industry thanks to its network of refineries and Petro-Canada fill-up stations across the country. The integration of its assets has, in past bear markets, helped it weather downturns.

This time around, Little said the company would have been forced to cut its dividend by the end of the second quarter, and decided to save $1.3 billion this year with a proactive cut.

“Did we want to spend money by paying the dividend when we thought it was very high probability we would have to cut it?” Little said. “If you had asked (CFO Alister Cowan) and I literally three months ago if we would cut the dividend, I think we would have been very confident that the answer to that would have been: ‘no, we can’t foresee a circumstance where that would occur’.”

The first quarter witnessed a collapse in global oil demand as major economies including the U.S. and Canada issued quarantine orders and commuters stayed home. Oil prices plunged to record-breaking lows, reaching negative values for some expiring contracts in the second quarter.

The dividend cut drew praise from analysts even as Suncor’s share price slid roughly two per cent to $22.80 per share in mid-day trading on the Toronto Stock Exchange.

“Building debt just to maintain a long-term track record of dividends doesn’t strike us as a pragmatic approach to capital allocation or balance-sheet management,” Raymond James analyst Chris Cox said in a Wednesday research noted, which he titled “pragmatism trumps pride.”

Until Wednesday, Suncor had been listed as a Canadian dividend aristocrat, a label for companies that have increased dividend payouts for 25 straight years, alongside the likes of Royal Bank of Canada and other oilsands giants Canadian Natural Resources Ltd. and Imperial Oil Ltd.

Following dividend cuts by Suncor, analysts believe more companies, including Canadian Natural, could follow suit. Imperial Oil left its dividend payout unchanged when it released a first-quarter net loss of $188 million last week.

An aerial view of Canadian Natural Resources Limited (CNRL) oilsands mining operation near Fort McKay, Alta. in 2013. Ryan Jackson/Edmonton Journal

Canadian Natural is scheduled to release results and host its annual shareholders meeting on Thursday.

“I think the one that set the tone was Royal Dutch last week,” National Bank Financial analyst Travis Wood said, referring to global super-major Shell’s April 30 decision to cut its dividend for the first time since 1945.

“If you don’t cut it, you’ll be under more scrutiny,” Wood said, noting that unlike Suncor and Shell, Canadian Natural is not an integrated producer with downstream refining assets that can act as a shock absorber when crude oil prices fall.

On Wednesday, another non-integrated producer, Crescent Point Energy Corp., reported earnings that provided a view into how painful the oil market collapse has been. The Saskatchewan-focused producer reported a $2.3-billion net loss for the first quarter, compared with net income of $1.9 million in the same period last year.

In the current market, even integrated majors such as Shell and Suncor have not been insulated against the crash in oil prices as quarantine orders have led to a rapid decline in refining economics.

If you don’t cut it, you’ll be under more scrutiny

Travis Wood said

“The convergence of global events has created a turbulent market situation. The COVID-19 pandemic and rapid demand reduction is unlike anything that’s occurred in modern times,” Suncor’s Little said, noting the company’s refineries were running at reduced capacity and trying to produce more diesel because demand for gasoline and jet fuel has cratered.

On Wednesday, West Texas Intermediate benchmark oil prices traded down just under 2 per cent to US$24.15 per barrel — an improvement over the single digit prices seen recorded in April but still below Suncor’s needed break-even price of US$35 per barrel.

“As we see improving market conditions and such, yes that’s happening, but it’s from the low of the low and so we’re expecting the second quarter to be far more challenging,” Little said.

Suncor has scheduled maintenance at its oilsands upgraders, moving those projects up to the second quarter of 2020, “which should help moderate the company’s upstream exposure,” Canaccord Genuity analyst Dennis Fong said in a research note.

The company has also shut down part of its Fort Hills oilsands mine given the precipitous drop in oil prices. In total, the company produced 739,800 barrels of oil equivalent per day in the first quarter, which is down from 764,300 boed in the same period a year earlier.

Financial Post

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