Spring. The season when the songbirds return from the south. When tulips and daffodils bloom. When bears emerge from hibernation.
This year, the bears have made Wall Street their feeding ground. They’ve already bitten off a big chunk of Nasdaq. They’re threatening to do the same to the S&P 500, which is down about 18 per cent year-to-date. The Dow isn’t in bear market range yet, but it’s in correction territory, off 14 per cent this year. (A bear market is a drop of 20 per cent+ from the previous high. A decline of 10 per cent+ is a correction.)
So far, the S&P/TSX Composite is relatively unscathed, with a year-to-date loss of just under 5 per cent, as of Friday morning. But that modest decline hides the true reality of the situation. One sector is carrying the whole index on its back: energy.
The S&P/TSX Capped Energy Index is up about 50 per cent this year, far and away for best performance of any sub-index. If it weren’t for that surge, the TSX would probably be in correction mode, if not worse.
It’s no secret why the sector is doing so well. World demand for oil and gas has surged in the wake of the Russian invasion of Ukraine and the imposition of sanctions that are pushing Europe to find alternative energy sources. The price of a barrel of oil has soared to over US$100 and threatens to go higher.
Gasoline prices in Canada are at record levels, with motorists paying more than $2 a litre in several provinces. It costs over $100 just to fill the tank.
But while motorists curse, the oil companies are rolling in profits. Canada’s largest producer, Suncor Energy (SU-T), last week reported the highest quarterly adjusted funds from operations in the company’s history of $4.1 billion ($2.86 per share). That beat analysts’ estimates of $2.72 a share. Net earnings were a shade under $3 billion ($2.06 per share) compared to $821 million ($0.54 per share) in the same period in 2021. On an earnings per share basis, that’s an increase of more than 280 per cent.
The company passed on some of the windfall to investors by raising its quarterly dividend 11.9 per cent to $0.47 per share ($1.88 annually). That’s the largest dividend in Suncor’s history and raises the yield on the shares to 4 per cent at the current price.
The company is also buying back its stock. Between Feb. 8 and May 6, Suncor repurchased about $1 billion worth of common shares on the open market. The directors and the TSX have approved an increase to the company’s normal course issuer bid program to increase the maximum number of common shares the company may buy to approximately 10 per cent of Suncor’s public float as at Jan. 31.
Suncor isn’t alone. Cenovus Energy (CVE-T) recently announced it is tripling its basic quarterly dividend to $0.105 ($0.42 a year) and announced a plan to increase buybacks or variable dividends when its quarter-end net debt is below $9 billion. When it’s at $4 billion, the company will direct 100 per cent of that quarter’s excess free funds flow to share buybacks and/or variable dividends.
Canadian Natural Resources (CNQ-T) increased its quarterly dividend by 27 per cent in March to $0.75 ($3 per year), to yield 3.8 per cent. The company reported first quarter net earnings of $3.1 billion ($2.63 a share, fully diluted). That compared to $1.4 billion ($1.16 a share) in the prior year.
It’s the same story everywhere you look in the conventional oil sector. Imperial Oil (IMO-T) announced its highest first quarter net income in over 30 years, at almost $1.2 billion. That was an improvement from $392 million the year before. Imperial raised its dividend by 26 per cent in March to $0.34 per quarter ($1.36 per year), to yield 2.1 per cent.
Tourmaline Oil (TOU-T) reported record cash flow and free cash flow in the first quarter and announced a special dividend of $1.50 per share, to be paid May 19. Freehold Royalties (FRU-T) increased its monthly dividend by a third in March to $0.08 per share ($0.96 a year), for a yield of 6.6 per cent. The list goes on and on.
This bonanza is great for the industry and for Canada. And for those who deride the on-going use of fossil fuels, most of these companies are trying to gradually move to clean energy alternatives. Suncor is selling off its conventional energy assets in Norway and the U.K., as well its solar and wind power assets, to focus on hydrogen, renewable fuels, and low-carbon power. The company says it is committed to accelerating its progress towards its strategic objective of becoming a net-zero greenhouse gas emitter by 2050.
So, it all looks rosy for the industry right now. Investors are following the money, but selectively. Canadian Natural Resources, Imperial Oil, and Tourmaline are trading near all-time highs. However, Suncor on Friday was trading at $49.42, well below its all-time high of almost $68, set in May 2008. Some of the smaller producers like Crescent Point Energy (CPG-T), Vermilion Energy (VET-T), and PrairieSky Royalty (PSK-T) are well down from their all-time highs despite the fact they’ve all raised their dividends recently.
The take-away is to be careful in investing in conventional energy. The sector is prospering now. But it’s a boom-and-bust business and many of the smaller companies still look weak despite the big jump in oil and gas prices. Stay with the large producers and be prepared to bail out if the oil price softens.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape