Tthe Surmont oil sands project, co-owned by ConocoPhillips and Total.Nathan VanderKlippe/The Globe and Mail
Canadian energy stocks have sputtered in an environment of deeply discounted heavy oil prices, rising costs and well-documented struggles exporting supplies. But there is a bright spot, and it shows money still talks.
A new energy benchmark shows companies that pay solid dividends have bucked the trend in a big way, a clear sign of strong demand for regular payouts from the oil and gas sector long after the end of the income trust era.
Calgary-based wealth manager TriVest Wealth Counsel launched its Canadian High-Yield Energy Index last month, and it shows large dividend-paying companies have far outpaced the Toronto Stock Exchange's capped energy index on a total-return basis for more than three years. The gap is widening with investors attracted to companies that on average have yielded 6 per cent a year.
Constituents include oil and gas producers, oil field service providers, infrastructure firms and midstream players such as Husky Energy Inc, ARC Resources Ltd and Mullen Group Ltd. To be in the club a company must pay a dividend of more than 4 per cent a year and have a minimum free float of at least $500-million. No single company can account for more than 10 per cent of the index. The list gets rebalanced quarterly to make sure criteria are met.
Check out the stats: since the start of 2010, the TSX capped energy index, which includes a range of integrated oil companies, producers and oil field service firms, has fallen 7 per cent on a total return basis. Compare that to the high-yield index, which has risen 35.8 per cent over the same period.
TriVest managing director and portfolio manager Martin Pelletier said he twigged to the performance while managing the firm's own risk-managed energy fund, but was unable to measure it in an efficient way. Many of the companies he watches closely are former income trusts that maintained healthy payouts after they converted to corporations when Ottawa removed their tax advantages.
"We couldn't find any benchmarks, so we said, 'What the hell – we'll create one,' " Mr. Pelletier said.
TriVest hired Structured Solutions AG, the German-based provider of financial market indexes, to handle the back-office work that maintains the benchmark.
With such solid performance, it's a shame energy buffs can't trade the high-yield index by itself. That looks set to change.
The next step is to use it as the basis of a passive investment instrument, similar to an exchange-traded fund. The company is in talks with potential partners that would push that forward.
It is expected to be of interest to retail investors, as well as pension funds, with the companies in the index currently trading at a value of about $300-million a day, said Mr. Pelletier, who does not have a target date for going to market.
"We're working aggressively on that," he said.
"We've received a tremendous amount of demand. The valuation is very attractive in a sector that's been challenged."
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