Canadian energy stocks are up about 40% from their March lows, but dark clouds are gathering for the Canadian energy sector.
Western Canadian Select, Alberta’s benchmark heavy oil, hit a record low below US $ 3 per barrel on Tuesday, driven by falling world prices that drove West Texas Intermediate crude below $ 20, an all-time low since 2002. Alberta’s rank changed hands to $ 6.35 on Wednesday, down 83% this year.
IShares S & P / TSX Capped Energy Index ETF fell 6% to trade at $ 3.92, down more than 60% from a year ago, but still starting at just 2.76 $ March 18.
A better Canadian product has not escaped falling prices. DBRS Morningstar debt watchers said in a report on Wednesday that Canada’s light oil benchmark fell to around $ 8 a barrel. “Crude oil prices in Western Canada are well below the level that producers need to achieve a balanced cash flow,” they warned, citing the “landlocked position of the basin and the constraints of access to world markets. Refineries in the United States and Canada have reduced their purchases of crude oil Western Canada and the storage available in the basin is rapidly filling up. “
Some energy companies are desperately producing oil to keep the lights on, but DBRS Morningstar says that “in Western Canada, about 0.5 million barrels per day of production has been cut, with the potential of more than a million barrels (about 25 percent of total production in Western Canada) will decrease in the coming weeks if prices remain depressed. “
Vermilion Energy Inc. suspends its monthly dividend after cutting it twice. Stifel warned on Wednesday that the suspension of payment “instead of continuing with a de minimis dividend, would force the additional sale from dividend funds”. Vermilion stock fell 16% to close at $ 5.03.
And Surge Energy Inc. is also killing its dividend after a 90% cut in early March. Raymond James said that Surge’s high debt “leverage remains a significant risk if commodity prices do not improve in the near or medium future”. The stock fell 18% to trade at 21 cents.
Meanwhile, TD analyst Menno Hulshof raises what he previously called “unthinkable”: a dividend cut by the integrated giants Canadian Natural Resources, Imperial Oil Ltd. and Suncor Energy Inc. after up to 25 years of dividend increases.
He said in a report on Wednesday that “in the absence of a substantial improvement in the fundamental upstream / downstream outlook in the coming months, we may see a cut in one or more of these companies to the end of the year “.
The analyst noted that “all three are well positioned from a liquidity perspective (ie could rely on the balance sheet to maintain the dividend)”, but also predicted that if they reduced payment, “the market would be fairly forgiving. We believe that most [investors] would consider a reduction as temporary and the right business decision if conditions did not improve. “
A group of oil and gas CEOs pleaded last week for help from the federal government, and Prime Minister Justin Trudeau said Tuesday he plans to make an announcement this week on support for hard-hit businesses. “Whether it be the tourism sector, the airline industry, or the oil and gas industry or whatever, we will have more to say on that shortly,” he said.
This means that politics can get mixed up when it comes to dividends. Hulshof of TD spoke of the possible “debt mismatch to maintain the dividend as the Canadian federal government seeks to establish some form of financial support for the industry.”