After reporting record profits in 2022, several energy stocks have been trading significantly lower in the last 15 months. Several macro headwinds, such as lower oil prices, geopolitical tensions, inflation, a sluggish global economy, higher interest rates, and lower consumer spending, have impacted revenue and profit margins for TSX energy stocks.
For instance, shares of Cardinal Energy (TSX:CJ) are down 68% from all-time highs. However, the pullback in prices has increased its dividend yield to an attractive 11%. Let’s see if investors should buy Cardinal Energy stock for its high dividend yield in 2024.
An overview of Cardinal Energy
Valued at $1 billion by market cap, Cardinal Energy is engaged in the acquisition, exploration, and production of petroleum and natural gas in Canadian provinces such as Alberta, British Columbia, and Saskatchewan.
It is an oil and natural gas company with operations focused on low-decline oil in Western Canada. According to Cardinal, it differentiates itself from its peers by having the lowest decline conventional asset base in Western Canada.
How did Cardinal Energy perform in Q3 of 2023?
A recovery in oil prices allowed Cardinal Energy to increase adjusted funds flow by 45% year over year to $81.2 million, or $0.51 per share, in the third quarter (Q3) of 2023. Comparatively, its production rose by 4% to 21,872 boe/d (barrels of oil equivalent/day) in the September quarter.
Cardinal Energy pays shareholders a monthly dividend of $0.06 per share, translating to a quarterly dividend of $0.18 per share. We can see that Cardinal Energy’s payout ratio in Q3 is less than 40%, providing the company with enough room to lower balance sheet debt, invest in growth projects, and target accretive acquisitions.
In Q3, Cardinal Energy lowered its net debt by 19% or $14.3 million, ending the quarter with a net debt to adjusted funds flow ratio of 0.2 times.
Alternatively, investors should understand that energy stocks such as Cardinal Energy are cyclical. The company suspended its dividends during COVID-19 and even cut its dividends by 50% in the last decade due to lower oil prices.
Recently, Cardinal Energy announced it completed an asset acquisition for $25 million, which should help it add two million barrels of proven developed producing reserves while contributing 900 boe/d of production in Q4 of 2023.
Last year, Cardinal Energy also disposed of or entered into agreements to dispose of non-core assets with low netback production of 400 boe/d within its Alberta asset base.
After accounting for acquisitions and divestitures, Cardinal forecasts to exit 2023 with the production of 22,500 boe/d, an increase of 3% compared to its previous guidance.
What’s next for Cardinal Energy stock?
In Q3, Cardinal Energy spent $30.3 million on capital expenditures, including the drilling and completion of eight wells in Alberta. These investments should help Cardinal Energy improve cash flow, dividends, and earnings going forward.
One of the key components of Cardinal’s business plan is to maintain peer-leading low production decline rates. A low decline base allows Cardinal to generate higher free cash flow and reduce capital expenditures to maintain production levels.
A few years back, Cardinal Energy identified steam-assisted gravity drainage as an area that could provide it with growth and further decrease decline levels. It has acquired these assets from Broadview Energy, which should allow it to improve its financials in 2024 and beyond.
