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Canada's Energy Sector Balances Growth and Shareholder Returns

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Energy Research & Strategy April 19, 2024
Energy Research & Strategy April 19, 2024
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Companies in the Canadian energy sector have been focused on streamlining operations and lowering greenhouse gas emissions to stay competitive with other global energy powerhouses; however, those efforts are often not reflected in company valuations. The sector is using share buybacks and dividends to entice investors, especially as large institutional investors retreat from carbon-based energy investments, but valuations have yet to catch up.

“It’s a missed opportunity,” my colleague Randy Ollenberger, Oil & Gas Producers Analyst at BMO Capital Markets, explained at the BMO Capital Markets CAPP Energy Symposium in Toronto. Valuations in the sector remain attractive even after the strong performance it’s already had this year. “We’re on the cusp of delivering significant amounts of surplus cash flow to shareholders, and we think that that cash flow will start to positively influence the valuation of the sector,” he told the crowd gathered at the preeminent energy conference featuring more than 300 delegates and roughly 60 companies.

That sentiment was echoed in the “Balancing Growth & Return of Capital Initiatives” panel that I moderated. The panel featured:  

  • Jonathan Wright, President and CEO, NuVista Energy 

  • Jim Riddell, President and CEO, Paramount Resources 

  • Grant Fagerheim, President and CEO, Whitecap Resources 

These CEOs try to balance shareholder demand for dividends and share buybacks with earning a better return on that free cash flow by investing in their own growth.

Return of capital  

NuVista Energy’s Jonathan Wright explained that those initiatives account for between two-thirds and 80% of the company’s cash flow, depending on commodity prices, while capex has been constant.

Paramount has adopted a similar strategy, focusing on dividends. Still, as much as Jim Riddell knows shareholders are looking for that payout, the priority is reserving some of its free cash flow to fuel its growth. “We’ve definitely heard loud and clear from investors that they want to see more return of capital,” he said.

Riddell understands where investors are coming from. They want to see an industry grow less and generate more free cash flow than in recent years. However, the other challenge is that there isn’t enough differentiation between the companies, with some prioritizing returning cash to shareholders, which may not always be the most productive way to use that cash flow. 

He expects the industry will shift toward the best opportunities. “The industry has to find a way to allocate capital to the best opportunities and not all the opportunities,” said Riddell.

Investors are looking for dividends and buybacks, but they also want to invest in companies with scale. They want to see that the energy companies can deliver in all markets. Regarding M&A, the panel believes consolidation to increase size and scale could boost valuations. 

Size does matter, and it can demonstrate more return on sustainability and profitability, said Whitecap’s Grant Fagerheim. “The ability to demonstrate that your company does feature both sustainability and profitability at various price levels is key,” he explained. “Just introducing size, potentially, could advance trading multiples.” 

Top takeaways from the Q&A session 

Q: Do you expect to see increased U.S. investor activism here in Canada as we’ve seen in the U.S.? 

A: Fagerheim responded, “The discussions will increase as we advance closer to October 2025, which is an election year here in Canada. There will be opportunities for U.S. producers and investors to come up here and potentially be more aggressive. Capital investment is mobile and goes where it is welcome and can provide a return.”

Q: How is access to capital different today?  

A: Riddell responded that it hasn’t had much impact because Paramount hasn’t relied as heavily on raising money in the equity market. “We’ve always tried to have a business that we’ve grown without having to use equities, so it feels like the playing field has been leveled a little bit, but the access to capital for the entire industry has been massively restricted,” he said.  

Q: What would it take for mid-cap companies to capture some of the LNG market?  

A: Wright explained that it continues to be challenging. “LNG has been a market that’s closed to smaller companies or intermediates, which is why we’re one of the founding members of Rockies LNG, a partnership of Canadian natural gas producers working together to advance West Coast LNG opportunities,” he said. “Separately, a company our size can’t compete in this part of the market, but together, we have 20% to 25% of the production and reserves in Canada.” 

For the closing remarks, summarizing the opportunity in the Canadian energy sector, Wright noted how natural gas producers have grown while substantially reducing overall emissions. “We have the best environmental ethics in the world. We have the best human ethics in the world. And as an industry, we have delivered huge reductions in methane and greenhouse gas emissions while being able to grow. That’s what the world should want.” 

Read more
Jeremy McCrea Oil & Gas Analyst


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