While most Canadian dividend stocks have tumbled in 2023, energy stocks have been gaining steam. Typically, these stocks have not been associated with reliable dividends because of their reliance on volatile energy prices.
However, the energy sector has been drastically changing over the past several years. Canadian energy stocks may become some of the best stocks you can own for dividend income. Here’s why.
A new shareholder return strategy for energy stocks
Firstly, Canadian energy stocks have drastically transformed their strategy and capital allocation. A decade ago, most oil and gas producers were focused on creating shareholder value by growing production.
Today, it is the opposite. Most energy companies are only growing annual production by the single digits. The strategy is now focused on improving balance sheets, simplifying operations, reducing costs, and then returning excess cash back to shareholders.
After the 2020 oil crash, many companies had to find operational efficiencies and pair back spending. As a result, many of these companies can generate excess cash returns with oil as low as US$40 per barrel.
Balance sheets are improving
Secondly, as noted above, balance sheets in the sector have drastically improved. Companies have been using excess cash to quickly reduce debt.
Several of Canada’s top energy producers have net cash positions and many are on their way to hit all-time low debt levels by 2024. Less debt drastically lowers the long-term financial risks inside these more cyclical businesses, so it just adds to the longevity of these stocks.
The cash is flowing and it’s coming back to shareholders
Thirdly, Canadian energy stocks are particularly well-positioned to provide attractive dividends and total returns. They are cheap. They yield a considerable amount of cash. They benefit from a weak Canadian dollar because oil and gas is generally sold in US dollars.
As many energy stocks hit debt targets, they are promising upwards of 50-100% of their excess cash will be returned to shareholders. That means great opportunities for buying back stock, growing their base dividends, and paying special dividends.
Tourmaline Oil: Where Canadian energy stocks are heading
One company that is already ahead of the rest is Tourmaline Oil (TSX:TOU). I see Tourmaline as the model for where the rest of the sector is heading.
Tourmaline is Canada’s largest natural gas producer, the fourth largest midstream processor, and the sixth largest liquids producer. The company has essentially no net debt.
Tourmaline has exceptional long-term assets and one of the largest gas reserves in North America. Canada’s largest natural gas producer owns the majority of its infrastructure, so it has a very low-cost operating structure. Likewise, it has access to sell its gas in some of the highest priced markets in the world.
Given its strong balance sheet, management has promised that most of its free cash flow will be returned to shareholders. Since late 2021, it has paid a cumulative total of $12.25 per share in special dividends to shareholders. It has also grown its base dividend by over 50% in that time.
Despite this, the company still plans to grow production by about 5% per year. As a result, shareholders may also get some attractive steady growth as well.
The point is, the sector is attractive for value, income, and even growth. You must be comfortable with the commodity volatility, but it could be a great place for dividends in the years ahead.
