Major Canadian oil producers’ ‘untouchable’ dividends are at risk

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The crash of the energy market is raising questions about the ability of Canada’s most financially stable oil companies to maintain their spotless records of paying dividends.

Numerous companies have cut or reduced payouts to shareholders as oil prices tumbled because of the coronavirus-induced economic slowdown. But dividends from the largest producers – Suncor Energy Inc., Canadian Natural Resources Ltd. and Imperial Oil Ltd. – have so far remained intact while the companies clawed back more than $3-billion in capital spending over the past month.

This could change before the year is out as production and cash flow fall, and debt levels climb as a percentage of their overall value, according to Toronto-Dominion Bank.

TD analyst Menno Hulshof said the three companies’ dividends have been “untouchable," even during previous downturns. Now, the possibility of cuts is the industry’s “multi-hundred-million-dollar question" as the prices for oil to be delivered in future months point to a lengthy rout, despite the best efforts of world producers to halt the slide.

“In the absence of a material improvement in the fundamental outlook for upstream/downstream [production and refining] in the coming months, we may see a cut from one or more of these companies towards year-end,” Mr. Hulshof wrote in a report to clients.

Previously considered sacrosanct, the dividends are in question as U.S. benchmark oil has fallen below US$20 a barrel, and Canadian heavy crude remains well under US$8. Demand for fuel has dwindled because of mass restrictions on transport in North America and around the world.

Last weekend, the Organization of Petroleum Exporting Countries (OPEC) and its oil-producing allies signed an unprecedented agreement to take 9.7-million barrels a day of oil off world markets. But the drop in consumption far outweighs the cuts, even with other countries, including Canada and the United States, shutting off millions more barrels of production as storage capacity fills up. The International Energy Agency (IEA) warned that industry conditions are likely to get worse before they improve.

Cenovus Energy Inc., Crescent Point Energy Ltd. and Vermilion Energy Ltd. are among Canadian companies that have suspended or nearly eliminated their dividends to deal with the crisis. These moves have accompanied major reductions in spending as they seek to preserve capital – and more cuts are expected in the coming weeks as the industry reports what are expected to be dismal first-quarter results.

Suncor, Canadian Natural and Imperial Oil have also sharply reduced expenditures as oil prices have fallen below break-even levels. Of the three, Imperial is least likely to reduce its dividend, as it has the strongest balance sheet as well as backing from its majority owner, Exxon Mobil Corp., Mr. Hulshof said. He said Suncor could lower its payout by 30 per cent before the end of the year, unless conditions improve.

Officials from Suncor, Canadian Natural and Imperial Oil did not respond to queries about plans to reduce dividends.

The IEA warned that no output cut by producers could offset the near-term falls facing the market. In its April report, the agency pegged the drop in demand this month at massive 29-million barrels a day – almost a third of pre-crash consumption – to levels not seen since 1995. West Texas Intermediate crude fell 24 US cents to US$19.87 a barrel on Wednesday.

The OPEC+ cuts do not take effect until next month, so production is set to increase in the coming weeks while demand tumbles amid economic lockdowns, IEA executive director Fatih Birol said.

“When we look back on 2020 we may well see that it was the worst year. … April may well have been the worst month – it may go down as Black April,” Mr. Birol told reporters.

Even if travel restrictions are eased in the second half of the year, the IEA projected this year’s global oil demand will fall by 9.3 million barrels a day from 2019, erasing almost a decade of growth.

While the agreements to cut output won’t rebalance the market immediately, the agency said they “should help bring the oil industry back from the brink of an even more serious situation than it currently faces.”

In Saskatchewan, the provincial government this week followed in the footsteps of Alberta to provide some relief to the energy sector. It has extended filing deadlines, halved the industry portion of the oil and gas administrative levy, and extended mineral rights that are scheduled to expire in 2020 by one year.

With a report from Reuters

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