What are we looking for?
Oil and gas companies in Canada currently paying dividends that are less likely to cut these payouts due to their positive free cash flow.
The screen
As the struggles continue for Canada's energy sector, more and more companies are cutting dividends as fundamentals deteriorate.
The Thomson Reuters Canada energy index is down about 24 per cent year to date while West Texas intermediate crude oil is down about 29 per cent during the same period.
As crude approaches its 2008 low of $32.94 (U.S.) a barrel, companies' operating costs are piling up and the break-even price for these companies is sitting well above the current crude price of about $39.
This dynamic has caused companies in this sector to cut dividends due to unsustainable yields and payout ratios.
The payout ratio expresses the percentage of earnings paid out to shareholders as dividends.
The screen identifies Canadian energy companies with a market capitalization above $300-million (Canadian) that currently pay dividends and have positive free cash flow in the past 12 months.
Free cash flow represents the actual cash that a company has after removing capital expenditures, which are costs related to maintaining or expanding the company's current asset base.
Simply put, positive free cash flow is an indicator of whether companies can continue to pay dividends at current yields.
More about Thomson Reuters
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Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.
What did we find?
Using Thomson Reuters Eikon, the results identified five energy companies in Canada that currently pay dividends and have positive free cash flow.
Topping the list is Cardinal Energy, a small cap junior oil-focused company that kept its dividend constant this year.
Cardinal Energy has a payout ratio of 77 per cent, which is respectable given the stock's 7.7-per-cent yield.
Cardinal Energy's ratio of free cash flow to dividends paid in the past 12 months is sitting at an impressive 1.5 times.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso works in the financial and risk unit of Thomson Reuters and specializes in asset management.