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Drilling for dividends in energy

Published on 10-02-2023

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Dividend dependables and fair-weather friends


Income investors want dependable, predictable cash flows. Surprises are not welcome. Right now, several fossil fuel energy stocks offer attractive yields. But these companies share a common trait: their businesses are vulnerable to rapid swings in the price of oil and gas.

The difference is in how they respond to these price movements. Some have made it a corporate priority to maintain their dividend even in the most difficult circumstances – Pembina and Keyera are examples. Others raise or cut their payouts at the first sign of any significant change in petroleum pricing – Freehold Royalties is a prime example.

Here’s a look at some mid-size energy firms, and their dividend policies.

The dependables

Pembina Pipeline Corp. (TSX: PPL). Pembina owns and operates an integrated system of pipelines that transport various products derived from natural gas and hydrocarbon liquids produced primarily in Western Canada.

During the pandemic slump, many investors expected the company to slash its very generous dividend, which at the time was $0.21 a month ($2.52 a year). The company kept insisting in each quarterly report that it was committed to maintaining the payment, but many people weren’t convinced.

The share price dropped all the way to $26.40 in March 2020, at which time the stock was yielding 9.5%. The price remained low for most of the year, until investors realized the company was serious about keeping its payout intact. At that point, the stock began a slow upward climb, finally regaining its pre-Covid level in May 2022.

The share price has drifted a little lower since, but a dividend hike last September has helped to stabilize the stock. It now pays $2.67 a year to yield 6.4%.

Keyera Corp. (TSX: KEY). Keyera is primarily in the natural gas and natural gas liquids (NGL) business, providing such services as gathering, processing, fractionation, storage, transportation, and marketing. It does not do any exploration or production.

Keyera also maintained its divided through the pandemic although it wasn’t as adamant about it as Pembina. In fact, the company has never cut its dividend, going back to 2003. It hasn’t raised it recently either, with the last bump coming in the summer of 2019. Currently, the stock pays $0.48 per quarter ($1.92 annually).

The share price hasn’t done much of anything either. After falling to the $13 range in March 2020, it rebounded to pre-pandemic levels in May 2021 and has been range-bound at that level since. The stock currently yields 5.9% and, based on history, it appears to be safe.

Gibson Energy Inc. (TSX: GEI). This is a Calgary-based oil infrastructure company. Its principal businesses consist of the storage, optimization, processing, and gathering of crude oil and refined products.

Gibson is another energy company that has never cut its dividend. In fact, it actually increased it annually from 2020 to this year. The current payment is $0.39 per quarter ($1.56 a year), to yield 7.8%.

The up-and-downers

Peyto Exploration and Development Corp. (TSX: PEY). Peyto is one of Canada’s leading gas exploration and production companies. It’s the fifth-largest Canadian producer with output of 635 MMcf/d and the tenth largest gas processor (970 MMcf/d). Peyto owns and operates 99% of its production and 12 gas processing plants.

Right now, Peyto is paying investors $0.11 a month ($1.32 a year) for an eye-popping yield of 10.7%. But the high yield reflects the uncertainty of what will happen when the next plunge in gas prices occurs. Peyto has a history of slashing its payout dramatically when the bear comes around.

In December 2017, the dividend was also at $0.11 a month. Then hard times hit the energy sector and the company slashed it 45%, to $0.06 a month at the start of 2018. By January 2019 it was down to $0.02 a month. In June 2020, it was cut in half again, to a penny. Investors were shell-shocked.

In fairness, the company was quick to raise it again when gas prices firmed. But the message to investors was loud and clear: if gas prices head down, you should head out.

Freehold Royalties Ltd. (TSX: FRU). Calgary-based Freehold has assets predominately in Western Canada, although it is expanding in the U.S. Its primary focus is to acquire and actively manage royalties, while providing a lower-risk income vehicle for shareholders.

Freehold is currently paying shareholders $0.09 a month ($1.08 a year), to yield 7.5%. But, as with Peyto, the question is for how long? History is not encouraging. At the end of 2015, the monthly dividend was $0.14 ($1.68 a year), and that had been unchanged for five years. Then began a series of cuts that eventually took the dividend down to $0.015 ($0.18 a year) in the spring of 2020.

As conditions improved, the company moved quickly to raise the payout, including four hikes in 2021. But it’s still well below the 2015 level and unlikely to see that again any time soon.

As these examples show, income investors need to look closely at the dividend history of a stock. Based on these examples, it appears infrastructure companies are likely to be more dependable than those that are involved in or dependant on exploration and production. The message is clear: Do your homework.

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. Subscribe now to receive a free copy of the special report “The Tumultuous Twenties.

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Notes and Disclaimer

Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. 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, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions. Image: Warguła.

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