Bonterra Energy Corp. (TSX: BNE) announced a massive 89% dividend cut on its $0.09 a share monthly payout on Thursday, November 29 to proactively manage its balance sheet in the face of an ever- deteriorating oil price environment in Canada. The stock took a further knock, but there’s new hope after latest interventions to remove pricing differentials.
The increasing price discount between the West Texas Intermediate (WTI), the world reference oil price, and Western Canada Select (WCS), the price obtained for many Alberta oil producers, continued to deepen during the last quarter of 2018 and the decline in world oil price through November threatened viability for most Canadian oil producing companies.
Bonterra Energy’s management quickly decided to adjust the high yield monthly dividend to a mere $0.01 per share to strike a balance between debt repayments, dividend pay outs and most critically, the necessary capital expenditures.
It’s not a high-yield stock anymore
Bonterra’s new $0.01 a share monthly dividend will yield 1.57% annually, given the $7.66 closing price on the stock on Tuesday. The dividend yield has declined from over 14% on November 29, and income investors will be better off looking elsewhere for significant monthly pay checks.
Although the company reiterated its commitment to a dividend paying strategy and maintains “the flexibility to adjust the dividend, increase capital spending or a combination of both,” I doubt that increasing the dividend would be one of its highest ranking priorities as the Canadian oil pricing situation improves.
Now that the wide oil price differentials on Canadian oil have substantially narrowed after Sunday’s breaking news of Alberta government intervention hit the market this December, we shall get a clearer picture on whether there’s any chance of a dividend increase next year as the company releases its 2019 capital budget and the related guidance in January.
A quick rebound in WCS this week
News that the Alberta government has ordered local oil producers to cut production by 8.7% starting January next year to ease rising inventories was the greatest catalyst the market needed to see a reduction in the Canadian oil discount to world prices.
The WCS price has significantly rebounded since Monday, and the discount could keep narrowing into January as new refinery capacity that came back online in November continues to reduce the supply glut that had severely impacted Canadian oil prices.
The rebound in WCS is a celebrated development for Alberta producers who don’t have any refinery capacity, and Bonterra stock traded 15% higher on Monday. Production cuts are expected to reduce supply surpluses and support better pricing for Canadian oil.
Is there more recovery potential?
Bonterra’s dividend was one of the factors that had supported the low cost sweet light oil producer’s stock price during market downturns, and the near 90% dividend cut is definitely not good news for an income investor.
That said, the timely rally in Canadian oil after a welcome government intervention and a massive dividend cut will significantly improve the company’s cash flow generation and debt repayment capacity while providing further free funds for capital spending — and probably a dividend raise. All these factors may sustain an improving share price.
The stock currently trades at a price-to-book value multiple of 0.50 times as the market prices in the risk of a further oil price weakness, but the 50% discount to net asset value also offers investors a wide margin of safety.
Foolish bottom line
The precipitous fall in world oil prices since October this year has shaken the markets, while a widening differential on Canadian oil threatened to plunge the Alberta economy into a serious crisis.
Government intervention has offered a short-term relief, but investments in new pipeline capacity, further oil industry production cuts, and additional rail transport capacity for crude and increased demand from refineries are preferred long-term solutions that could sustain competitive pricing for Canadian oil.
Most noteworthy, the trajectory of world oil prices in 2019 is the most important factor that will determine Bonterra Energy’s equity valuation going forward. A recovery from the recent WTI plunge is forecast, with Reuters analyst poll results on November 30 predicting better-than-average oil prices for 2019 than those realized so far this year.
Should the predicted scenario play out, Bonterra Energy is one of the best oil recovery plays.
