A technician opens a pressure gas valve inside the Oil and Natural Gas Corp. (ONGC) group gathering station on the outskirts of the western Indian city of Ahmedabad March 2, 2012.AMIT DAVE/Reuters
The past year has been gruesome for the Canadian intermediate energy names that pay juicy dividends, but a recent recovery in natural gas prices is finally offering them a smidgeon of hope.
No doubt, the natural gas market is still in the toilet. Yet last quarter average NYMEX gas prices jumped 26 per cent over the quarter prior, and average AECO gas prices climbed 21 per cent.
That's not to say these energy companies are out of the woods. As CIBC World Markets analyst Jeremy Kaliel notes, even though oil and gas prices have improved, "uncertainty over both commodities will remain a central theme over the next six months."
But there's at least some light. And the recent chatter around energy mergers and acquisitions is giving them even more reason to be cheerful, despite the chance of some federal government intervention.
No matter what plays out, maintaining distributions will be key for the dividend-heavy energy intermediates, which begin reporting quarterly earnings this week. Just look at what happened to Pengrowth Energy Trust, which cut its dividend in July, for proof. The stock is down 45 per cent year-to-date.
For now, the sector is in decent shape and "sustainability of dividends is reasonably secure," Mr. Kaliel noted. But some companies are in better shape than others, and his favourites are Baytex Energy Corp., Crescent Point Energy Corp., and Vermilion Energy Inc.
According to his calculations, the companies' outflows relative to their total inflows are among the lowest in the peer group, and their average total debt to cash flow is just one times. The group average is 2.4 times.
Still, Crescent Point – which has been a busy buyer in 2012 – is down 8 per cent since January, while Baytex is down 21 per cent. Vermilion is one of the few bright spots, up 5 per cent since the start of the year.
In fact, strip out the returns of Progress Energy, which is bolstered by its pending takeover bid from Petronas, and the only intermediate dividend-heavy energy name with any traction has been Perpetual Energy, up about 27 per cent this year. So even modest gains could generate big praise. Or at least relief.
Tim Kiladze