“Pragmatism on Pride”: Suncor is no longer a dividend aristocrat – and others could follow suit

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CALGARY – After posting a net loss of $ 3.5 billion on Wednesday and cutting its previously untouchable dividend, Suncor Energy Inc. has warned that more difficult times for the energy industry are coming and are predicting a sustained recovery in oil markets.

“There is no doubt that the second quarter will be much more difficult than the first quarter, both upstream and downstream of the business,” Suncor President and CEO Mark Little said on Wednesday. a profit call as the company posted a huge loss net for the first three months of the year and cut its quarterly dividend by 55 percent to 21 cents per share.

Little said the company expects oil markets to “recover significantly” by 2022, but a period of economic uncertainty may persist thereafter and lead to “lower commodity prices and a higher volatility ”.

Suncor, Canada’s largest oil producer by market capitalization, is considered one of the most stable operators in the domestic energy industry thanks to its network of Petro-Canada refineries and service stations across the country. The integration of its assets has helped overcome past downturns in past bear markets.

This time around, Little said the company would have been forced to cut its dividend by the end of the second quarter and has decided to save $ 1.3 billion this year with a proactive cut.

“Did we want to spend money paying the dividend when we thought it was very likely that we should reduce it? Little said. “If you had asked (CFO Alister Cowan) and I literally three months ago if we were going to reduce the dividend, I think we would have been very confident that the answer would have been: ‘No, we cannot foresee a circumstance where that would happen. “

The first quarter saw a collapse in global demand for oil, with major economies including the United States and Canada issuing quarantine orders and commuters staying at home. Oil prices plunged to record levels, reaching negative values ​​for some contracts expiring in the second quarter.

The drop in dividend has been praised by analysts even as Suncor’s share price fell about 2% to $ 22.80 per share on the Toronto Stock Exchange.

“Building debt just to maintain a long-term dividend history doesn’t seem like a pragmatic approach to capital allocation or balance sheet management,” said Raymond James analyst Chris Cox in a published study Wednesday, which he entitled “pragmatism”. trumps pride. “

Until Wednesday, Suncor was on the list of Canadian aristocrats on dividends, a label for companies that have increased their dividend payments for 25 consecutive years, alongside Royal Bank of Canada and other oil sands giants , Canadian Natural Resources Ltd. and Imperial Oil Ltd.

Analysts say more companies, including Canadian Natural, may follow after Suncor’s dividend cuts. Imperial Oil left its dividend unchanged when it reported a net loss of $ 188 million in the first quarter last week.

An aerial view of Canadian Natural Resources Limited (CNRL) oil sands mining near Fort McKay, Alberta. in 2013.

An aerial view of Canadian Natural Resources Limited (CNRL) oil sands mining near Fort McKay, Alberta. in 2013.


Ryan Jackson / Edmonton Journal

Canadian Natural is expected to publish its results and hold its annual meeting of shareholders on Thursday.

“I think the man who set the tone was Royal Dutch last week,” said Travis Wood, financial analyst at National Bank, referring to the April 30 decision by global super-big company Shell to cut its dividend. for the first time since 1945.

“If you don’t cut it, you’ll be under surveillance,” said Wood, noting that unlike Suncor and Shell, Canadian Natural is not an integrated producer with downstream refining assets that can act as a buffer when the crude oil prices fall.

Another non-integrated producer, Crescent Point Energy Corp., announced profits on Wednesday to see how painful the oil market collapse has been. The Saskatchewan-based producer reported a net loss of $ 2.3 billion for the first quarter, compared to net profit of $ 1.9 million for the same period last year.

In today’s market, even integrated majors such as Shell and Suncor have not been shielded from the collapse in oil prices, as quarantine orders have resulted in a rapid decline in the refining economy.

If you don’t cut it, you will be under surveillance

Travis Wood said

“The convergence of world events has created a turbulent market situation. The COVID-19 pandemic and the rapid reduction in demand is unlike anything that has happened in modern times, “said Suncor’s Little, noting that the company’s refineries were operating at reduced capacity and were trying to produce more diesel because the demand for gasoline and jet fuel has cratered.

West Texas Intermediate benchmark oil prices fell just under 2% to US $ 24.15 a barrel on Wednesday – an improvement from April’s single-digit prices, but still below the threshold Suncor’s required profitability of US $ 35 per barrel.

“As we see an improvement in market conditions and the like, yes, this is happening, but it is from lowest to lowest and therefore we expect the second quarter to be much more difficult,” said Little.

Suncor has scheduled maintenance for its oil sands upgraders, moving these projects to the second quarter of 2020, “which should help moderate exposure upstream of the company,” said Canaccord Genuity analyst , Dennis Fong, in a research note.

The company also closed part of its Fort Hills oil sands mine due to the sharp drop in oil prices. In total, the company produced 739,800 barrels of oil equivalent per day in the first quarter, down from 764,300 boed in the same period a year earlier.

Financial Post

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