By Michael Hainsworth
Crude oil is enjoying its best run in 4 years, pushing prices to a level not seen since before the financial crisis of 2008, and that has companies flush with cash – cash they’re returning to shareholders in the form of share buybacks and dividend increases. And that’s a trend that’s expected to continue.
Ninepoint’s senior portfolio manager and partner Eric Nuttall sees a new floor for the benchmark price, West Texas Intermediate. “We've had to deal with regional lockdowns in China, we've had the Biden administration try to first talk down and then try to move down the oil price, given the SPR releases,” he says, adding, “I reflect back on we are in a structural bull market due to structural supply challenges and we are an environment, then, of higher oil prices, which I think we're finding a very good $100 floor.”
You might need to pick your jaw up off that floor: Cenovus just tripled its dividend after profit clocked-in 7 times greater than Q1 of 2021 with an EPS of $0.81 on $17.96B in revenue driven by higher average realized sales prices both up and downstream. The dividend has been boosted from $0.035/share to $0.105/share. Cenovus boosted its expected capital spending for 2022 by $300M to $2.9B-$3.3B, but that’s not to find more crude, it’s to rebuild the Superior Refinery in Wisconsin.
Nuttall says with long reserve life across the industry, there’s no need to pull more oil out of the ground to capitalize on triple digit crude prices. But will sky-high prices lead to demand destruction? Nuttall doesn’t think so. “Periods of negative demand growth are very, very rare,” he points out. “You'd have to go back to the financial crisis and obviously COVID for those very unique times in history, so I do expect the rate of growth to decline and in fact, that's part of my thesis, but I don't see negative demand growth for the foreseeable future.”
“Giddy” is how Nuttall describes Canada’s oil sands CEOs. Their shares are trading at 30% free cash yields, and that will be spun back to shareholders starting in the next six months and continuing into the beginning of next year. The sector will be debt-free next year, shares will be bought-back, and dividends will flow leading to a re-rating potential, Nuttall says, that will reveal just how cheap oil stocks are today. “I truly don't understand why more people do not see what we see,” he says, bewildered.
As for pump prices? With the average price at $1.83/litre at the start of Q2, will we ever see prices return to pre-war levels? Nuttall doesn’t think so, but he also isn’t concerned. “If it pains you to fill up your car it only means one thing. You don't own enough energy stocks or you don't own enough of an energy fund,” he cautions.
“I do the happy dance every time I fill up because I know that I'm being commensurately rewarded on the other side.”