Prices for oil and natural gas are high these days, of course. Just keep in mind that energy markets careen from boom to bust. In the next bust, oil companies are likely to cut or eliminate their dividends first. These dividends are riskier than dividends paid by companies in more stable industries.
Key oil stocks Suncor Energy and Cenovus Energy, have raised their dividends. Suncor has increased its dividend by 12 per cent, to $1.88 a share. Cenovus Energy has tripled its dividend, to 42 cents a share.
Suncor has also arranged to increase its share buyback plan. It can now repurchase up to 10 per cent of its shares. Meanwhile, Key stock Imperial Oil is buying back shares directly from shareholders.
Cenovus Energy Inc. (TSX—CVE)
On the strength of its balance sheet and operating performance, Cenovus Energy is further increasing its shareholder returns. The company has approved a tripling of its quarterly base dividend to $0.105 a share, starting in the second quarter. It has also announced a plan for additional increases to shareholder returns.
Beyond the base dividend increase, it will target a return of 50 per cent of free cash flow to shareholders when net debt is less than $9 billion. (In the first quarter of 2022, net debt was $8.4 billion, down from $13.3 billion a year earlier.) The company will do this through share buybacks and/or variable dividends while also continuing to pay down debt. Its ultimate debt target is $4 billion. Cenovus is a buy for growth and some income.
Suncor Energy Inc. (TSX—SU; NYSE—SU)
Elliott Investment Management wants to shake up the board of directors at Suncor Energy and launch a strategic and management review. Elliott, one of the largest U.S. hedge funds, sees a $30-billion value creation opportunity, and a potential share-price increase for Suncor of 50 per cent or more.
According to Elliott, Suncor has seen a decline in the exceptional performance that was formerly its hallmark. The firm says Suncor has missed production goals, and has suffered from high costs and safety failures. Consequently, shareholders have seen their investment fall behind all large-cap oil and gas companies in North America. Indeed, even though oil prices have climbed to their highest level in nearly a decade, Suncor’s share price remains virtually unchanged since early 2019.
Steps to restore confidence
Elliott wants to take five steps to improve the company’s results and restore confidence in it. First, it wants to add five new directors to the board. Second, it wants a review of the chief executive officer, Mark Little, to ensure the right management is in place. Third, it wants to overhaul the company’s operational and safety culture, and deliver on its long-promised $2-billion cash flow improvement plan. Fourth, it wants to increase capital returns to provide shareholders with an industry leading annual cash yield. And fifth, it wants to explore opportunities to unlock value from assets outside of the core oil sands business, including the company’s retail gas station chain.
Suncor has said it will “carefully assess” Elliott’s recommendations, but it also expressed confidence in its existing strategy. It’s unclear how much influence Elliott can have with just a 3.4-per-cent stake in Suncor.
Buy for growth and income
Regardless of the outcome, we continue to see value in Suncor’s shares. It may be that Elliott will be able to improve the company’s future stock price performance, but we feel that Suncor should do well enough, if not spectacularly, on its own. Buy for growth and income.
This is an edited version of an article that was originally published for subscribers in the May 13, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846