Oil prices have softened a little recently, but the mid-sized energy recommendations in my Income Investor newsletter continue to generate nice returns for income-oriented investors. Here are updates on three of them. (Prices are as of midday on Tuesday.)
Gibson Energy Inc.
- Ticker: GEI-T
- Type: Common stock
- Current price: $22.03
- Annual payout: $1.56
- Yield: 7.1 per cent
- Risk Rating: Higher risk
- Website: www.gibsonenergy.com
Comments: Gibson Energy is a Calgary-based liquids infrastructure company. Its principal businesses consist of the storage, optimization, processing, and gathering of liquids and refined products. The company’s operations are focused around its core terminal assets located in Alberta at Hardisty and Edmonton. Gibson also has a facility in Moose Jaw, Sask., and an infrastructure position in the United States.
The company’s results for the fourth quarter and full year 2022 were released recently and they were encouraging for investors.
Gibson reported revenue of just over $11-billion for the full year, which included $2.5-billion in the fourth quarter. The 12-month total was an increase of $3.8-billion or 53 per cent over 2021. The company said the jump in revenue was mainly because of higher commodity prices.
Net income was $223-million for the full year, including $64-million in the fourth quarter. That was a year-over-year increase of $78-million or 54 per cent.
Distributable cash flow for 2022 was $356-million, up $65-million (22 per cent) over 2021. The dividend payout ratio on a trailing 12-month basis was 60 per cent, which is below the company’s 70 to 80 per cent target range.
The company announced a 5-per-cent dividend hike to 39 cents per quarter ($1.56 a year), beginning with the April payment. Combined with a small pullback in the share price, that increases Gibson’s yield to a very attractive 7.1 per cent.
The company also continues to buy back shares. Gibson repurchased 2½ million shares for an aggregate $59-million in the fourth quarter. That brought the total for 2022 to six million shares for an aggregate $146-million, representing over 4 per cent of outstanding shares.
- Ticker: KEY-T
- Type: Common stock
- Current price: $32.49
- Annual payout: $1.92
- Yield: 6.1 per cent
- Risk rating: Higher risk
- Website: www.keyera.com
Comments: Keyera is primarily in the natural gas and natural gas liquids business, providing such services as gathering, processing, fractionation, storage, transportation, and marketing. It does not do any exploration or production.
The company reported a fourth-quarter loss of $82-million that was caused by a non-cash impairment charge of $180-million primarily related to its Simonette gas plant. For the full 2022 fiscal year, Keyera showed a profit of $328-million, up slightly from $324-million in 2021.
Distributable cash flow was $104-million for the fourth quarter, down from $207-million in the same period of 2021. For the full year, this cash flow was $654-million compared to $669-million in 2021. The company said the decrease owed to higher maintenance capital spending.
The company ended the year with net debt to adjusted EBITDA of 2½ times, at the low end of its target range of 2½ to three times.
Although the 2022 numbers weren’t as encouraging as I had hoped, the company is building out its core infrastructure, which should increase revenue and profit going forward. The company has acquired an additional 21-per-cent working interest in the Keyera Fort Saskatchewan complex, adding significant and immediate capacity that offers meaningful synergies with its integrated platform. It said the construction of its $1-billion KAPS pipeline is 99 per cent complete and announced it has approved a 40-million-cubic-feet-per-day capacity expansion at its Pipestone gas plant at a cost of $60-million to $70-million. The project is expected to be completed by the first quarter of 2024.
Keyera did not announce a dividend increase for this year but is planning to move from monthly to quarterly payments in June. Unless there is a change in the dividend rate between now and then (unlikely), the new quarterly payment will be 48 cents a share.
Freehold Royalties Ltd.
- Ticker: FRU-T
- Type: Common stock
- Current price: $14.43
- Annual payout: $1.08
- Yield: 7.6 per cent
- Risk: Higher risk
- Website: www.freeholdroyalties.com
Comments: Freehold is an oil and gas royalty company based in Calgary. It has assets in five provinces and eight U.S. states. Its primary focus is to acquire and actively manage royalties, while providing a lower-risk income vehicle for shareholders. Freehold has land holdings totaling more than 6.4 million gross acres in Canada and 0.9 million gross drilling unit acres in the United States.
Fiscal 2022 was a good one for Freehold, with record performances on several fronts. These include revenue, funds from operations, production, and wells drilled.
Chief executive officer David Spyker said the results owed to “the significant work done over the last three years to establish the company as a premier North American energy royalty company. Our expansion and optimization efforts have resulted in a ‘new look’ Freehold, with the scale and asset base that will enable sustainable, long-term value creation for our shareholders.
“By targeting plays across North America, our asset base, development inventory, and revenue generation is underpinned by exceptionally high-quality payors in many of the top tier operating areas across North America. Freehold’s fourth-quarter and full-year 2022 results reflect this quality.”
Royalty and other revenue totaled $393 million for the year, up 88 per cent over 2021. Higher production volumes and a strong commodity price environment were the main drivers. Revenue from the U.S., which has been the target of the company’s recent expansion, accounted for 37 per cent of the total.
Funds from operations for 2022 came in at $316.5-million ($2.10 a share), up 67 per cent from $189.6-million ($1.39 a share) in 2021.
Dividends paid per share almost doubled year over year, to 94 cents in 2022 compared to 45 cents in 2021. The payout ratio was 45 per cent, a significant increase from 33 per cent in 2021. But the dividend appears to be sustainable as long as oil prices stay near current levels. Freehold raised the dividend twice in 2022.
Total production was 14,101 barrels of oil equivalent a day in 2022, up 19 per cent from 11,844 in the prior year.
During 2022, $190.8-million was allocated to portfolio reinvestment The focus of the 2022 acquisitions was on the continued enhancement of the U.S. portfolio, with transactions completed in the Permian and Eagle Ford areas.
Proved and probable oil and natural gas reserves totalled 54.5 million barrels of oil equivalent a day as of Dec. 31, 2022, up from 49.8 million on Dec. 31, 2021. Freehold replaced 160 per cent of proved reserves and 190 per cent of proved plus probable reserves.
The yield is attractive but be aware that Freehold has a history of quickly adjusting its dividend, up or down, if there is a significant change in oil prices.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe