Dividend bonanza expected in oil, gas - 'Money is rolling in' due to near-record high prices in second quarter, analyst says
The Globe & Mail, Monday, July 19
By PATRICK BRETHOUR
CALGARY -- Energy firms are likely to start paying higher dividends, analysts say, as buoyant energy prices in the second quarter have left them with a gusher of cash.
"I think you're going to see a raft of higher dividends," said Martin Molyneaux, managing director of research at FirstEnergy Capital Corp. in Calgary.
Commodity prices, already high a year ago, have risen even further, handing energy firms strong cash flow this past quarter if they were able to keep production volumes steady.
And the protracted run of high prices means that many firms have paid off as much debt as is prudent, meaning that they will have to find some other way to dispose of the cash.
"Money is rolling in and we're seeing very, very healthy balance sheets," said Brian Prokop, an analyst with Peters & Co. Ltd. in Calgary.
Mr. Molyneaux said he believes the most likely conduit for that cash will be higher regular dividends. Energy analysts generally view higher dividends as a sign of optimism by a company that commodity prices will not weaken in the near future.
The FirstEnergy analyst said the patterns in natural gas futures contracts on the New York Mercantile Exchange indicate that prices won't peak until the first quarter of 2005. "If you believe [that], the best is yet to come," he said.
For the moment, there is little sign of oil prices slowing down either.
U.S. light crude hit a high of $41.80 in New York trading on Friday before easing to end at $41.25, just short of the record price of $42.33 set on June 1.
Mr. Prokop said the more a company's production is tilted toward oil, rather than natural gas, the better it will fare, comparatively speaking.
The second-quarter average crude price on the Nymex is up nearly a third from the same period a year ago, while the average natural gas price has risen just 7 per cent, Mr. Prokop observed.
Companies that have not sold their production ahead of time will be able to make the most of those high prices, he said.
"The oilier, unhedged names will do better."
That should mean that Talisman Energy Inc. will enjoy a bigger boost than, for instance, EnCana Corp., whose production is heavily weighted toward natural gas, although both firms will be better off than in the year-ago quarter, at least as far as commodity prices are concerned.
Mr. Prokop said he believes that independent producers will funnel their cash into dividends, share buybacks and acquisitions, ranking all three as equally likely. Among trusts, he said, unit holders could see special one-time payouts.
Nexen Inc. was the first major Canadian company to report, announcing disappointing results last Thursday because of a surprise decline in production. The company's earnings shortfall illustrates the main pitfall for the oil patch in a quarter of high energy prices: an inability to keep oil and gas flowing at a rapid clip.
This week will see four companies unveil their second-quarter numbers: Husky Energy Inc. and Canadian Oil Sands Trust on Wednesday and Imperial Oil Ltd. and Shell Canada Ltd. on Thursday. The following week, EnCana, Petro-Canada and Talisman weigh in, with Canadian Natural Resources Ltd. reporting in the first week of August.
Analysts will be zeroing in on refining margins at integrated energy companies that extract, refine and sell crude oil products. Mr. Molyneaux said the swings in those gross margins during the second quarter make it hard to gauge how well the downstream operations have fared at each of the five integrated firms: Husky, Shell, Petrocan, Suncor Energy Inc. and Imperial. "It's going to be a bit of a noisy quarter downstream."
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