Cenovus, which pays out 50 per cent of its free cash flow to shareholders, tripled its base dividend to 10.5 cents a share earlier this year.Todd Korol/Reuters
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Energy stocks are notoriously volatile, but many oil and gas companies flush with cash are now turning into high-octane dividend payers.
Some are offering payouts for the first time. Others are raising their quarterly base dividends, adding variable or special dividends, and buying back stock.
Bountiful payouts stem from rising commodity prices amid warnings of a supply crunch, and companies returning capital to shareholders instead of investing heavily in production growth.
Commodity prices can swing wildly. West Texas Intermediate crude futures have tumbled to the mid-US$70-a-barrel range among growing concerns about a recovery in Chinese demand due to surging COVID-19 infections, and a wave of protests erupting in that country. Crude oil traded at about US$110 a barrel in March. For energy bulls, falling prices can be a buying opportunity.
Globe Advisor asked three portfolio managers for their top picks among dividend-paying energy companies.
Rafi Tahmazian, senior portfolio manager and director, Canoe Financial LP in Calgary
The fund: Canoe Energy Income Portfolio Class
His Pick: Headwater Exploration Inc. HWX-T
Shares of the energy exploration and development company are compelling because it’s focused on Alberta’s prolific Clearwater oil play and it has just started paying a regular dividend, Mr. Tahmazian says.
Calgary-based Headwater Exploration, which acquired its Clearwater assets two years ago from Cenovus Energy Inc., started exploiting the play and has now ramped up to 15,000 barrels of oil equivalent a day (boe/d), he says.
“Over the next year, it should grow in excess of 20,000 boe/d,” he says. “Its net cash is now $115-million. The economics are exceptional. It’s very profitable.”
Because it has been unable to acquire more assets in the Clearwater play, it’s returning excess cash to shareholders with a 40-cent per annum dividend.
“We wouldn’t be surprised if it expanded this dividend a year from now,” he says.
Headwater is a lower-risk play because it has a strong balance sheet and operates in an environment where there is a growing supply crunch, he adds. Its shares trade cheaply at 4.5 times enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA).
His pick: Topaz Energy Corp. TPZ-T
Topaz Energy, whose revenue stems from land royalties and natural gas infrastructure assets, is an attractive investment because it’s less susceptible to commodity price swings, Mr. Tahmazian says.
The Calgary-based company acquired its first royalty and infrastructure assets from Tourmaline Oil Corp., Canada’s largest natural gas producer.
Topaz has exposure to gas properties in the British Columbia Montney and land royalties from Alberta’s highly economic Clearwater oil play. In the latest quarter, it increased its quarterly dividend by 7 per cent to 30 cents a share.
“It’s just clipping a royalty, so it doesn’t have the massive overhead of a producer,” he says. “The risks of drilling, procurement and growing assets, and managing decline rates [of wells] are in the producers’ hands.”
Because it’s less risky than an energy producer, Topaz has been trading recently at around 9 to 10 times enterprise value to debt-adjusted cash flow or double the valuation of producers, he adds.
Eric Nuttall, senior portfolio manager and partner, Ninepoint Partners LP in Toronto
The fund: Ninepoint Energy Income Fund
The pick: Cenovus Energy Inc. CVE-T
Cenovus is a compelling dividend play because the energy producer plans to pay out 100 per cent of its free cash flow to shareholders when its net debt drops to $4-billion, Mr. Nuttall says. “We have them hitting that target by year-end.”
The Calgary-based oil sands company, which pays out 50 per cent of its free cash flow to shareholders, tripled its base dividend to 10.5 cents a share earlier this year. It recently also declared a variable dividend of 11.4 cent cents a share.
“With US$100-a-barrel oil as our base case for 2023, Cenovus is expected to do a 10-per-cent share buyback next year and have a 16-per-cent yield from a combination of base and variable dividends,” he adds.
The company merged with Husky Energy Inc. in 2021.
“We like Cenovus because it has about 30 years of reserves,” he says. “We think it’s ultimately a $51 stock.”
The commodity price is the biggest risk, he says, adding that “even at US$70-a-barrel oil, we see a 9-per-cent dividend yield [base and variable]. Its stock trades at three times enterprise value/EBITDA versus its peers at five to six times.”
The pick: Viper Energy Partners LP VNOM-Q
Shares of Viper Energy, which has mineral royalty interests in the Permian Basin, are attractive as a less-risky, energy play, Mr. Nuttall says.
The Midland, Tex.-based variable distribution partnership gets a royalty based on acreage held by Diamondback Energy Inc., which spun out Viper.
There isn’t exploration risk because Viper is not drilling the wells and doesn’t have the operating costs, he adds. “It gets a cheque every month from the revenue.”
Viper’s risk stems from the commodity price and the volumes produced, he says. If the oil price and volumes rise, Viper’s ability to pay an increasing dividend goes up, but if the oil price falls, the dividend goes down.
At US$70-a-barrel oil, “we expect a total dividend yield [base and variable] of about 7.9-per-cent, and at US$100-oil, a 11-per-cent total dividend yield,” he says.
Viper, he adds, trades attractively at about 6.7 times forward cash flow.
Mike Dragosits, portfolio manager, Harvest Portfolios Group Inc. in Oakville, Ont.
The fund: Harvest Energy Leaders Plus Income ETF HPF-T
The pick: ConocoPhillips Co. COP-N
Global oil and gas producer ConocoPhillips, which is on track this year to return 50 per cent of its cash from operations to shareholders versus 38 per cent last year, is a compelling investment for income seekers, Mr. Dragosits says.
This year, the Houston-based company began offering a quarterly “variable return of cash” in addition to paying a quarterly dividend and buying back shares.
ConocoPhillips, which aims to return at least 30 per cent of cash from operations to shareholders annually, recently raised its quarterly dividend by 11 per cent to 51 cents a share and declared a variable payout of 70 cents a share.
The company’s growth will come from its producing assets and exploration projects in 14 countries, and investments in liquified natural gas projects, he says.
Commodity prices are a risk, but being a low-cost producer will help it maintain its margins through a full economic cycle, he says. Its stock trades at a premium valuation versus peers, reflecting its higher-quality assets and low debt levels.
The pick: EOG Resources Inc. EOG-N
EOG Resources, which began offering a special dividend last year, has become even more attractive for income seekers, Mr. Dragosits says.
The Houston-based oil-and-gas company hiked its quarterly base dividend by 10 per cent to US82.5 cents a share in its latest quarter. It also declared its fifth special dividend, which in this period was US$1.50 a share.
EOG has never cut or suspended payouts in its 23-year history and has raised its regular dividend on average by 21 per cent annually from 1999 to 2021, he says.
“That’s incredible given the volatility [in commodity prices] in the recent past.”
EOG has been taking a more conservative approach to spending on its wells, he notes. It requires a 60-per-cent return on highly profitable projects, assuming oil at US$40 a barrel and natural gas at US$2.50 per thousand cubic feet.
Given that EOG faces commodity price risk, it helps that the company is a low-cost producer, he says.
EOG, he adds, trades at a premium valuation versus its peers but that is indicative of its higher-quality assets, good profitability metrics and low debt.
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