Oil and gas stocks have been the champions of the first quarter of 2022, but industry executives, having learned hard lessons from prior downturns, are treating this boom differently.
Jeff Tonken, president, CEO, and chairman of the board of Birchcliff Energy, said management teams have gained experience working through industry downturns and have now built resilient companies.
“And because we have a commodity price run, they’re not going to start spending money for two reasons. One is, their investors want a return on capital, … because they understand that it’s a cycle,” Tonken said.
“The second thing is they’ll fortify their companies so that they probably have cash on their balance sheets and that is what’s going to remove the volatility.”
He was speaking during media availability at the Scotiabank CAPP (Canadian Association of Petroleum Producers) Symposium on April 5, in response to a question from The Epoch Times on volatility when investing in the energy sector and what companies can do to mitigate that risk.
Historically, investing in oil and gas companies has been a roller-coaster ride, stemming from wild swings in the price of oil. But company heads say the significant profit generation in the current environment should lead to more stability.
Craig Bryksa, president and CEO of Crescent Point Energy, told The Epoch Times that “a focus for a lot of the companies out there right now is free cash flow generation, continuing to strengthen your balance sheet, and then grow your return to capital to shareholders. That will likely remove some of that volatility that you’ve seen over the last few years.”
“I think we do have some room to go here as a sector, and ideally, commodities stabilize and there’s a little bit more predictability around future cash flows that gives the overall investment community more comfort of stepping back in,” Bryksa added.
The Toronto Stock Exchange, with its concentration in energy companies, is one of the few stock markets to be up in the first quarter. The TSX energy sector was up over 50 percent, with the overall index being up 3.4 percent.
The S&P 500 energy sector was up nearly 40 percent in the first quarter, while that overall index was down 4.6 percent.
Oil and gas company executives are balancing repaying debt, returning capital to shareholders, and capital investment.
“We’re in a far different position than we were when the last downturn came, which was people immediately started drilling when the commodity prices went up. That’s not what we’re going to see this time,” Tonken said.
He added that he’s concerned about a “jobless recovery”—companies aren’t rushing to hire the way they may have done in the past even as the price of crude oil—West Texas Intermediate—has been over US$100 a barrel for the majority of the last month.
“The service industry is not expanding. We’re not seeing new pipelines built. So what we’re going to see is harvesting of cash flows. And that would take away volatility. So I think our industry will be much stronger over the next 18 months than it has ever been.”
Boon for Shareholders
Ian Dundas, president and CEO of Enerplus Corp., said the most important principle is having a sustainable business, and growth can be layered on top. Enerplus is looking for more opportunities to return capital to shareholders and has been buying back its own stock.
“We’ve been buying back a lot of stock because we look at the intrinsic value of our stock … and we see a discount, and so that feels like a thoughtful investment decision,” he told symposium attendees.
Dundas said Enerplus has generated free cash flow of $700 million over the last five years, and about 60 percent of it has gone back to shareholders.
Canadian Natural Resources Ltd. has been a leader in high dividend payouts to shareholders. The Calgary-based oil and natural gas company raised its dividend by 13 percent in 2020 and by 38 percent in 2021.
“One thing I can say, no matter what we look at, [is] that it’s going to be sustainable over the long run. And we always want to keep it growing,” Canadian Natural president Tim McKay said about the company’s dividend during the symposium.
Brian Schmidt, president and CEO of Tamarack Valley Energy Ltd., said his company bases its longer-term planning on a US$55-per-barrel oil price with a breakeven price of $35, which includes payment of a base dividend.
Companies are setting debt-reduction targets that would trigger a greater return of capital to shareholders.
Bryksa said Crescent Point sees value in buying its own shares and is doing so on a daily basis. The company is increasing share repurchases to up to $150 million and expects to be done by the middle of the year.
“I can think of a picture where in the next couple of years there’s no debt within the sector,” he said.
Tide Has Turned
The Russian invasion of Ukraine that started on Feb. 24 was a big pivot in the world of energy, said Jim Burkhard, VP and head of research for oil markets, energy, and mobility at IHS Markit, during the symposium’s opening keynote speech.
Burkhard said the theme of energy security—ensuring stable, affordable, and sustainable supplies of energy—will have staying power over the next several years, as Russia has undermined decades of history as a reliable supplier and is now an unwanted provider.
He outlined six ways in which the world has changed, and his first point was that values such as democracy have gained “greater sway in economic affairs.”
This provides Canada with an opportunity to not only address energy security but also energy affordability, Bryksa said.
“We certainly have the opportunity, when you look at us as far as technology and efficiency, both from an operation side but also from an environmental side. We’re leaders in both,” he said during the symposium.
“I’m excited to ideally put a stamp on every incremental barrel that makes its way onto the market—[to help ensure it] has a Canadian flag stamped on that.”
And while one of the biggest challenges any company executive faces is inflation, the oil and gas industry has the natural hedge of the product it produces. Executives are also saying that they are managing inflation by finding operating efficiencies and budgeting for its cost. Where inflation is mostly manifesting, they say, is in the price of steel and in skilled labour.
Despite being a punching bag, under pressure to dramatically reduce emissions, the industry is thriving—and not simply because the elevated price of oil is the tide that lifts all boats. Industry management is looking for sustainability, paying down debt, and giving shareholders what they want.
“Everyone’s cash flow is extremely strong and we are still treated as a bit of a sunset industry,” Bryksa said.