It was only a few years ago that the oil patch was thriving on prices of
more than US$100 a barrel, and Canada was being touted as one of the
world’s energy superpowers, based on our massive heavy oil reserves.
But everything changed in 2014, when world oil prices began to tumble in
the face of oversupply and an inability of OPEC to agree on production
cuts. By February 2016, the price for West Texas Intermediate (WTI) crude
was about US$26 a barrel, and some analysts were predicting it could fall
as low as US$20.
The slide in oil prices wasn’t the only problem plaguing the industry.
Getting Canadian output to markets was becoming increasingly difficult. One
by one, multi-billion-dollar pipeline projects were being killed off.
During his final months in office, U.S. President Barack Obama vetoed
Keystone XL, despite a positive recommendation from his officials.
(President Donald Trump has since given the project the go-ahead, but there
is still some question as to whether it will actually be built.)
The Trudeau government effectively derailed Enbridge’s Northern Gateway
pipeline, which would have carried bitumen from the oil sands to Kitimat,
by banning tanker traffic off the north coast of British Columbia.
TransCanada’s $12 billion Energy East pipeline was the next casualty – it
was cancelled in late 2017 in the face of opposition from Quebec and
mounting regulatory demands.
Two years ago, I wrote an article titled “Will we ever build another
pipeline?” in which I said, “A nation whose wealth is closely tied to
resources seems to have suddenly decided that economic stagnation is
preferable to any project that might — and I stress the word ‘might’ — have
a negative effect on the environment”.
If you need any further evidence of that, look at the battle that is raging
over Kinder Morgan’s Trans-Mountain pipeline. It’s the last hope of getting
Alberta oil to Canadian tidewater, and in order to make that happen Ottawa
had to nationalize it.
In the face of all this, is it any wonder that energy stocks are no longer
a significant part of most portfolios?
But it’s time to take a fresh look. The supply-demand imbalance is
narrowing. Gross mismanagement is cutting into output from Venezuela. There
are concerns about supplies from Libya. Donald Trump has pulled the plug on
the Iran nuclear deal and reimposed sanctions, thereby threatening that
country’s exports of more than two million barrels of crude oil a day.
Canadian oil stocks generally are benefitting from this turmoil. One that I
particularly like is
Vermilion Energy Inc. (TSX: VET), which is raised its dividend by 7%, to $0.23 a month ($2.76 per year),
effective with the May 15 payment. At a price of C$47.41 (June 30), that
translates into a very attractive yield of 5.8%.
This was Vermilion’s first dividend increase since 2014, but it’s important
to note that it was one of the few former energy income trusts not to
reduce its payout after converting to a corporation. The company says that
“delivering a consistent and sustainable dividend is a key priority.”
Vermilion is a rarity among mid-size Canadian oil producers in that about
half of its production is from foreign assets in countries like France,
Ireland, the Netherlands, and Germany. As a result, it is able to sell that
part of its output at higher international prices.
First-quarter results weren’t spectacular compared with the fourth quarter
of 2016 due to lower production. This was a result of a planned shut-in of
a well in the Netherlands, cold weather downtime in Canada and the U.S.,
and the temporary shut-in of gas at a German site for instrumentation
Despite this, first-quarter revenue jumped to $318.3 million this year from
$261.6 million in the first quarter of 2017. Funds from operations (FFO)
were $157.5 million ($1.27 per share, fully diluted), up from $143.4
million ($1.19 per share) the year before.
The company is expanding its European operations, drilling its first
natural gas well in Hungary, which it expects to bring into production this
year. Vermilion plans to drill several more wells in that country over the
next few years as well as in Slovakia and Croatia and says it is optimistic
about the prospects in the region.
As well, the company recently announced it is acquiring Spartan Energy, an
oil producer in southeastern Saskatchewan, for $1.4 billion, including
debt. Management says the deal will be “accretive to all pertinent metrics,
adding 7% to production per share, 15% to fund flows per share, and 13% to
total proved plus probable reserves per share.”
The purchase of Spartan was a key factor in a significant increase in the
company’s production guidance for this year. It now projects output of
86,000 to 90,000 barrels of oil per day equivalent, up from an estimate of
75,000 to 77,500 in January.
Given the volatility of the oil industry, this is not a stock for
conservative investors, despite the company’s diverse assets, strong
dividend history, and positive outlook. But for those willing to assume a
little more risk, the yield is very attractive, and the stock held up much
better than most other mid-size energy companies during the downturn.
Gordon Pape is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investor
newsletters, which are available through the Building Wealth website.
For more information on subscriptions to Gordon Pape’s newsletters,
check the Building Wealth website.
Follow Gordon Pape on Twitter at
https://twitter.com/GPUpdates and on Facebook at
Notes and Disclaimer
© 2018 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
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own financial advisor before making investment decisions.
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