The Organization of the Petroleum Exporting Countries (OPEC) has agreed to pump more crude oil starting July 2022. Some of the cartel members are also looking at the possibility of suspending the supply agreement with Russia and non-OPEC members.
If a consensus is reached to end the long-standing OPEC+ quota, Saudi Arabia and United Arab Emirates can step to curb rising crude prices and prevent a world recession. Meanwhile, WTI and Brent prices remain sky high or above US$120 per barrel. Capital Economics believe that energy prices will stay historically high throughout this year.
On the investment front, Scotiabank Global Equity Research analysts say that investors will benefit from Canada’s oil patch. Because of higher crude prices and disciplined spending, oil companies have a significant margin of safety. It will enable them to reward shareholders with substantial dividend payouts until 2023.
Scotiabank analyst Jason Bouvier said, “Industry’s focus on capital discipline and operational efficiency is likely to support further increases in dividends and share buybacks.” He added that initiating special or variable dividends in 2023 is likely if balance sheet improvements continue and targets are reached.
All eyes should be on Suncor Energy (TSX: SU)(NYSE: SU) and Cenovus Energy (TSX: CVE)(NYSE: CVE). Both oil and gas stocks have significantly sweetened investors’ perks recently. It appears the target is to achieve the highest dividend level in the companies’ history.
Oil bellwether
In Q1 2022, Suncor Energy’s revenue grew 57% to $13.5 billion versus Q1 2021. It earned $2.95 billion in the first quarter, up from $821 million in the same period of 2021, as the war in Ukraine and energy supply fears drove oil prices higher. Its refinery crude throughput and refinery utilization were 436,500 barrels per day (+1.9%) and 94% (up from 92%), respectively.
Suncor’s net earnings for the quarter reached $2.95 billion in the first quarter, or a 259.3% year-over-year increase. Management said that the Russia-Ukraine war and energy supply fears drove oil prices higher. The quarter’s highlight was the 12% dividend hike announcement effective June 24, 2022.
The said increase was the highest ever in Suncor’s history. At $51.23 per share (+65.71% year to date), the $72.67 billion integrated oil & gas company pays a 3.66% dividend.
Clear path to grow shareholder returns
Cenovus is among the top price performers in the energy sector with its 95.24% year-to-date gain. Also, at $30.23 per share, the trailing one-year return is 175.25%. The current dividend yield is 1.39% following a 200% increase recently. Management sees lots of opportunities to continue raising the payouts reasonably.
During the Q1 2022 earnings release, its president and CEO Alex Pourbaix said, “Today we’ve laid out a clear path for how we will continue growing shareholder returns while positioning the balance sheet to support that returns growth profile for years to come.”
Pourbaix added that he has “line of sight” to continue boosting the company’s dividend over the next five years. Because of stronger oil prices, Cenovus earned a profit of $1.6 billion in Q1 2022 compared to the $408 million net loss in Q1 2021.
Enough legroom
Suncor and Cenovus have the legroom to increase their dividends further because of high free cash flow yield. The hikes could be substantial if they can reduce net debts significantly.
