The rip-roaring TSX energy sector this year hasn't found favour among investors just because of strengthening crude oil and natural gas prices. The trend of more players offering juicy dividend payouts has certainly played a part, too.
CIBC World Markets analysts are convinced producers will keep funnelling free cash flow into the hands of stockholders into the second half of this year and probably beyond, supported by the strong commodity prices as well as low declines in well production rates and healthy balance sheets.
"In our view, dividend sustainability among Canadian explorers and producers is as healthy as we have seen for quite some time," the CIBC analysts, led by Jeremy Kaliel and Adam Gill, said in a research note today.
They pinpointed five energy stocks in particular that are likely to soon hike their dividends: Cardinal Energy Ltd., TORC Oil and Gas Ltd., Bonterra Energy Corp., Whitecap Resources Inc. and Vermilion Energy Inc.
The five stocks are projected to have a total payout ratio averaging 85 per cent in 2015, which would be below the group average of 99 per cent. They also look attractive next to peers when it comes to their balance sheets, with debt running an average of 0.7 times estimated 2014 cash flows, versus 1.7 times for peers.
"In our view, this combination of low payouts and low debt to cash flow indicates both the availability of excess free cash flow, and that this excess cash flow is not needed for balance sheet repair in the case of Cardinal, TORC, Bonterra, Whitecap and Vermilion," the CIBC note said.
The analysts expect all five stocks to boost dividends this year – with the exception of Vermilion, which they think is more likely to bump its payout in 2015.
Three other names - Long Run Exploration Ltd., Surge Energy Inc., and Twin Butte Energy Ltd. - also screen well for sustaining their dividends, thanks to their low payout ratios. But CIBC believes these three producers are more likely to opt to direct excess cash flow to their balance sheets, rather than to dividend increases (their debt levels are roughly 1.6 times cash flows).
The bank also sees one company, Spyglass Resources Corp., cutting its dividend this year. The stock's debt-to-cash-flow ratio is estimated at 4.5 times for this year – the highest among producers under CIBC's coverage.
"We consider the sector in general to have very good fundamental sustainability today – and we would rank Cardinal, Vermilion and Whitecap best for long-term sustainability of production and dividends, while Spyglass currently ranks the weakest," it said.
The CIBC analysts also believe that more junior companies in the second half of this year will start paying out dividends, motivated by the premium valuations that are being awarded by yield-seeking investors.