Brace for More Dividend Cuts in Canada Oil Patch

Dividend cuts among Canadian energy producers are poised to accelerate as cost reductions fail to boost shrinking cash flow.

Companies from Canadian Oil Sands Ltd. to Baytex Energy Corp. are in line for deeper payout decreases, according to analysts, after Crescent Point Energy Corp. slashed its dividend for the first time last week as crude sank to a six-year low.

Just 38 percent of the 63 energy companies in Canada’s Standard & Poor’s/TSX Energy index had positive free cash flow, defined as operating cash flow minus capital expenditures, as of Aug. 17. That’s down from 43 percent in 2013, data compiled by Bloomberg show. The dwindling cash flow comes even after Canadian companies joined some $180 billion in global cutbacks this year, the most since the oil crash of 1986, according to Rystad Energy AS, an Oslo-based energy consultant.

“There’s so much cash being spent on dividends,” said Greg Taylor, a fund manager at Aurion Capital Management in Toronto, whose firm manages about C$7.2 billion ($5.5 billion). “You can get increased cash flow by cutting costs but that’s not a sustainable model. The idea dividends are a sacred cow, that’s being put on the backburner.”

Companies most likely to cut their dividends include Canadian Oil Sands, Baytex and Pengrowth Energy Corp., said Sam La Bell, an analyst at Veritas Investment Research Corp. in a telephone interview in Toronto.

Dividend Cuts

All three have already cut their dividends, though Baytex and Pengrowth will become more vulnerable if oil prices remain low as their hedges begin to roll off as soon as the second half of this year, La Bell said. Canadian Oil Sands, which chopped its payout by 86 percent in January, may be better off canceling the dividend altogether as it struggles to generate cash, he said.

“We know the dividend is important to our investors, but even more so is protecting the long-term value of their investment,” said Siren Fisekci, a spokeswoman at Canadian Oil Sands, in an e-mailed response. “We will continue to consider dividends in the context of crude oil prices and Syncrude operating performance.”

Spokesmen for Baytex and Pengrowth didn’t respond to multiple phone and e-mail messages seeking comment.

The prospect of more dividend cuts comes as oil producers have plunged 34 percent over the past year, the worst-performing industry on the main S&P/TSX Composite Index amid a supply glut and concerns of slowing global growth. Canadian energy firms have already eliminated thousands of jobs and shelved projects to conserve cash.

Twenty-three percent of firms in the energy index had reduced their dividends at the end of the second quarter, Bloomberg data show. That compares with almost 40 percent in the same period in 2009 after oil slumped in a global recession, according to the figures.

West Texas Intermediate oil has slumped more than 30 percent from this year’s peak in June, tumbling to $41.87 a barrel in New York Monday, the lowest close since March 2009.

Highest Yield

Meanwhile, the drop in share prices has pushed the average yield among dividend-paying energy stocks to 7.6 percent, the highest among 10 industries in the S&P/TSX.

“For sure we’ll see more cuts, they will come in the next two to three quarters,” said Andrey Omelchak, chief investment officer at Montreal-based LionGuard Capital Management. The firm manages less than C$100 million. “There will be negative earnings revisions across the board so it’s not a trade you want to do today.”

Crescent Point slashed its monthly dividend 57 percent to 10 cents a share Aug. 12 after its yield ballooned to 16 percent. Baytex, which still yields 14 percent, cut its payout by more than half in December while Trilogy Energy Corp. eliminated its dividend entirely in the same month.

“When you get into double-digits it’s a very big warning,” said Craig Fehr, Canada market strategist at Edward Jones, in an interview at Bloomberg’s Toronto office. His firm manages about $900 billion globally. “Every company has a unique approach to their dividend strategy, which means there’s not a hard line in the sand. You won’t see the big heavyweights in the patch want to pay 5 percent-plus dividend yields over long periods of time.”

Suncor Dividend

Some companies, such as Suncor Energy Inc., have a healthy enough balance sheet that they’ve increased their dividend, said Geoffrey Pazzanese, a global equity fund manager at Federated Investors Inc.

The Calgary-based producer raised its quarterly dividend 3.6 percent to 29 cents a share July 29. Suncor yields 3.2 percent.

“They think they can kick the can down the road and hope for higher prices next year,” Pazzanese said on the phone from New York, who helps oversee about $360 billion.

When reached for comment Erin Rees, a spokeswoman at Suncor, reiterated Chief Executive Officer Steve Williams’ remarks in a second-quarter analyst call.

“As we grow the business and the cash flow grows you will continue to see our dividend grow,” Williams said at the time.

While energy companies juggle costs and spending, the ultimate dividend decider will be global energy prices, which are out of their hands, said Paul Taylor, chief investment officer, asset allocation at BMO Asset Management Canada in Toronto.

“If oil stays at this level there will be cuts: It’s just gravity,” he said. His firm manages about C$77 billion. “While you want the stability of the dividend you have to look at the oil environment.”