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When the bears came out of hibernation this spring, they made Wall Street their feeding ground. The Nasdaq Composite Index is in a bear market. They’re threatening to do the same to the S&P 500 Composite Index, which is down 19% year-to-date. The Dow Jones Industrial Average isn’t in bear market range yet, but it’s in correction territory, off 13.3% year to date. (A bear market is a drop of 20%+ from the previous high. A decline of 10%+ is a correction.)
So far, the S&P/TSX Composite Index has dropped into correction, with a year-to-date loss of 13.3%. But that decline hides the true reality of the situation. One sector is carrying the whole index on its back: energy.
The S&P/TSX Capped Energy Index is up 25.9% this year, far and away for best performance of any sub-index. If it weren’t for that surge, the TSX would probably be in bear mode.
It’s no secret why the sector is doing so well. World demand for oil and gas has surged in the wake of the Russian invasion of Ukraine and the imposition of sanctions that are pushing Europe to find alternative energy sources. The price of a barrel of oil has soared to over US$100 and threatens to go higher.
Gasoline prices in Canada are at record levels, and over recent weeks, motorists have paid more than $2 a litre in several provinces. It costs over $100 just to fill the tank.
But while motorists curse, the oil companies are rolling in profits. Canada’s largest producer, Suncor Energy Inc. (TSX: SU), recently reported the highest quarterly adjusted funds from operations in the company’s history of $4.1 billion ($2.86 per share). That beat analysts’ estimates of $2.72 a share. Net earnings were a shade under $3 billion ($2.06 per share) compared with $821 million ($0.54 per share) in the same period in 2021. On an earnings per share basis, that’s an increase of more than 280%.
The company passed on some of the windfall to investors by raising its quarterly dividend 11.9% to $0.47 per share ($1.88 annually). That’s the largest dividend in Suncor’s history and raises the yield on the shares to 3.8% at the current price.
The company is also buying back its stock. Between Feb. 8 and May 6, Suncor repurchased about $1 billion worth of common shares on the open market. The directors and the TSX have approved an increase to the company’s normal course issuer bid program to increase the maximum number of common shares the company may buy to approximately 10% of Suncor’s public float as at Jan. 31.
Earlier this month, CEO Mark Little resigned, and just this week, Suncor reached a deal with activist investor Elliott Investment Management to review Suncor’s retail business (including Petro-Canada), with a view to “unlocking” shareholder value, giving the share price a quick lift.
Suncor isn’t alone. Cenovus Energy Inc. (TSX: CVE) recently announced it is tripling its basic quarterly dividend to $0.105 ($0.42 a year) and announced a plan to increase buybacks or variable dividends when its quarter-end net debt is below $9 billion. When it’s at $4 billion, the company will direct 100% of that quarter’s excess free funds flow to share buybacks and/or variable dividends.
Canadian Natural Resources Ltd. (TSX: CNQ) increased its quarterly dividend by 27% in March to $0.75 ($3 per year), to yield 4.2%. The company reported first quarter net earnings of $3.1 billion ($2.63 a share, fully diluted). That compared with $1.4 billion ($1.16 a share) in the prior year.
It's the same story everywhere you look in the conventional oil sector. Imperial Oil Ltd. (TSX: IMO) announced its highest first-quarter net income in over 30 years, at almost $1.2 billion. That was an improvement from $392 million the year before. Imperial raised its dividend by 26% in March, to $0.34 per quarter ($1.36 per year, to yield 2.3%.
Tourmaline Oil Corp. (TSX: TOU) reported record cash flow and free cash flow in the first quarter and announced a special dividend of $1.50 per share, to be paid May 19. Freehold Royalties Ltd. (TSX: FRU) increased its monthly dividend by a third in March to $0.08 per share ($0.96 a year), for a yield of 5.9%. The list goes on and on.
This bonanza is great for the industry and for Canada. And for those who deride the ongoing use of fossil fuels, most of these companies are trying to gradually move to clean energy alternatives. Suncor is selling off its conventional energy assets in Norway and the U.K., as well its solar and wind power assets, to focus on hydrogen, renewable fuels, and low-carbon power. The company says it is committed to accelerating its progress towards its strategic objective of becoming a net-zero greenhouse gas emitter by 2050.
So, it all looks rosy for the industry right now. Investors are following the money, but selectively. Canadian Natural Resources, Imperial Oil, and Tourmaline have backed off their recent all-time highs. However, Suncor closed Friday at $39.32, well below its all-time high of almost $68, set in May 2008. Some of the smaller producers like Crescent Point Energy Corp. (TSX: CPG), Vermilion Energy Inc. (TSX: VET), and PrairieSky Royalty Ltd. (TSX: PSK) are well down from their all-time highs despite the fact they’ve all raised their dividends recently.
The takeaway is to be careful in investing in conventional energy. The sector is prospering now. But it’s a boom-and-bust business, and many of the smaller companies still look weak despite the big jump in oil and gas prices. Stay with the large producers and be prepared to bail out if the price of crude oil price softens.
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.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2022 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.
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