As commodity prices continue to languish and first-quarter 2015 earnings announcements loom, the oil-field services sector's once secure and lucrative dividends face increasing volatility.
The oil industry's "new normal," characterized by slowing production, capital budget cuts and layoffs, has TD Securities Inc. analyst Scott Treadwell adjusting his 2015 outlook. The analyst reduced his first-quarter and annual estimates for a number of oil-field services firms. It's unwelcome news for yield-seeking investors - as the lower estimates make some company's dividends look dangerously high.
"We have seen EBITDA estimates for 2015 fall incrementally," the analyst said. "On our reduced estimates, we have re-examined the impact of the current dividend payouts on the balance sheet from a short-term [leverage] perspective as well as more strategically, as it applies to covenants and capital structure."
Mr. Treadwell pointed to two companies, in particular, whose dividends are in a precarious position. He forecast that Trican Well Service Ltd. and Essential Energy Services Ltd. will cut their dividends in the short term.
For Trican, the analyst said the material slowdown the company experienced in the first-quarter will accelerate the drop in its trailing 12-month EBITDA-to-interest ratio, likely causing a covenant breach as early as the end of the third quarter. While Mr. Treadwell expects the company and its lenders to manage the situation, a cut in the dividend would be a "prudent" first step to take. The analyst forecast an 83-per-cent cut to the company's dividend, or a reduction to 5 cents from 30 cents annually.
Mr. Treadwell also forecast of a 67-per-cent cut to Essential Energy's dividend, which would save the company about $10-million annually. The savings would allow the company to "better deploy" the funds in a more aggressive growth plan. While the analyst acknowledged that many yield-seeking investors would be disappointed by a cut, management could create long-term value for shareholders by strongly positioning the company as the industry inches toward recovery in 2016. The cut would lower the dividend to 4 cents from 12 cents annually.
In addition to those likely cuts, the analyst noted three companies which can afford their current payout but may choose to cut their dividend to reduce debt quicker. Calfrac Well Services Ltd., Horizon North Logistics Inc. and Canyon Services Group Inc. are all in this uncertain position. Of the three, Mr. Treadwell views Horizon North, whose dividend yields about 14 per cent, as the most likely to cut. Nevertheless, he said the company's less demanding capital expenditures and a lower level of debt as reasons it may choose to maintain its dividend.
There are a also a number of companies whose dividends the analyst views as stable. Mr. Treadwell does not expect Savanna Energy Services Corp., Total Energy Services Inc., Trinidad Drilling Ltd., Western Energy Services Corp., Newalta Corp. or Mullen Group Ltd. to change their payout in the short term unless management pursues a strategic shift to capital allocation.
And despite the current commodity environment, the potential to raise payouts is not out of the question, it seems. Precision Drilling Corp., Ensign Energy Services Inc., Secure Energy Services Inc., Enerflex Ltd. and ShawCor Ltd. are all in a position where they could raise their current dividend, according to Mr. Treadwell. Though the analyst said these companies can afford a dividend hike, he noted that they will likely be "very hesitant" to do so until they see signs of improved activity.