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Earlier this month, Canadian Natural Resources Ltd. surprised Bay Street with a 28-per-cent dividend increase.Todd Korol/The Globe and Mail

There’s a different kind of gusher in the oilpatch right now – cash.

With crude oil prices soaring, the Canadian oil and gas sector is generating more money than it knows what to do with.

In the absence of big, ambitious expansion plans, much of that windfall is being handed over to shareholders in the form of dividends and buybacks.

Earlier this month, Canadian Natural Resources Ltd. CNQ-N surprised Bay Street with a 28-per-cent dividend increase, part of what analysts expect to be nearly $10-billion in shareholder payouts by the company this year.

“Almost all of these companies are now talking about a return of capital, which is really quite remarkable for this sector,” said Michael Decter, chief executive officer of Toronto-based investment firm LDIC Inc.

In the past, an oil boom was typically treated as an occasion for rampant spending and aggressive growth.

“They’ve plowed money into capex, they’ve gone crazy drilling more wells and acquiring other companies, and they’ve run their debt up,” Mr. Decter said.

That left the oilpatch vulnerable to the downturn that inevitably followed.

Most of the past decade has seen the Canadian energy sector in retreat, cutting costs, reducing debt and consolidating, amid an oversupplied global oil market.

By the time the world’s economy emerged from the pandemic-induced recession, and crude prices started to inch upward, Canadian oil and gas had learned to get by on much less than US$100-per-barrel oil.

Imperial Oil Ltd. IMO-T, for example, can break even at about US$25, the company reported at its investor day on Thursday. At US$35 oil, it can also cover dividends and sustaining capital.

“We need the business to be resilient at a wide range of prices,” said Brad Corson, Imperial’s CEO. “At today’s prices, we can generate a lot of cash and grow our returns to shareholders.”

The war in Ukraine has recently pushed West Texas Intermediate as high as US$130 a barrel, as the U.S. ban on Russian crude imports and the prospect of growing sanctions on the country has put a big chunk of the global oil supply in question.

While the oil market has been highly volatile, with a barrel of WTI settling at US$109.33 on Friday, current prices translate to enormous profits for the sector.

“It’s a wall of cash,” said Laura Lau, chief investment officer at Brompton Group. “There are some rising costs related to the current inflationary environment, but for the most part, that money falls straight to the bottom line.”

This year, the industry should generate more than $100-billion in excess cash after shelling out for expected capital expenditures, according to estimates from ARC Energy Research Institute. In 2020, that figure was effectively zero.

The industry does not seem ready to let go of its new-found discipline on spending. And even if it were, there is still not enough pipeline capacity to handle any big jump in Canadian crude supply if producers went into expansion mode.

Some of the excess cash will go toward strengthening balance sheets. But, “a lot of the oil and gas companies have paid off so much debt, how much more can you actually pay off?” Ms. Lau said. Some corporate debt obligations can’t be paid off before maturity, for example.

That leaves dividends and share repurchases as the likely fate for the bulk of those billions.

Canadian income investors ought to be looking to the energy sector as the greatest generator of dividend growth on the Toronto Stock Exchange this year, Ms. Lau said.

Over the past few years, stock market returns have mostly come courtesy of explosive capital gains, much of that generated by the tech sector.

That’s typical of earlier-stage bull markets. But as the cycle moves into its middle stages, dividends tend to take on greater importance.

In an era of energy inflation, a weighting in oil and gas becomes doubly important to counter the erosive effect of rising prices on household income, Ms. Lau said.

“It’s a great way for the average Canadian to hedge your cost of living. We all drive or use transportation, and energy is also passed through to our food costs.”

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