Canadian oil companies, lighter in debt, have cash to spare despite falling prices

Bonterra Energy

09/12/2022 11:00

By Rod Nickel
       WINNIPEG, Manitoba, Dec 9 (Reuters) - After a bumper
year of share buybacks and dividends, investors in debt-light
Canadian oil and gas producers are set to reward shareholders
even more in 2023 as they generate ample cash and show little
appetite for acquisitions.
    Oil companies are facing faltering prices and Canadian firms
are also absorbing an unusually punishing discount for their
heavy-grade crude. 
        BMO Capital Markets analysts estimate the top 35
companies will generate C$54 billion ($39.7 billion) in free
cash flow in 2023, 16% lower than this year. But the portion of
cash that flows to shareholders may be higher because companies
will spend less on debt repayment, BMO's managing director of
oil and gas equity research Randy Ollenberger said.
    "We don’t see 2023 as being challenging for the sector given
the improvement to balance sheets," he said.
    Most large- and mid-size producers expect to be
net-debt-free in the second half of 2023, according to BMO. Net
debt represents a company's gross debt minus cash and cash-like
assets.
    Companies might accelerate buybacks next year ahead of
Canada's planned 2% buyback tax, which takes effect in 2024,
according to CIBC.
    One company with cash to spend is Bonterra Energy Corp
 BNE.TO , a conventional oil producer extracting 13,500 barrels
of oil equivalent per day.
    It faced an existential threat in 2020 when the COVID-19
pandemic crushed oil prices. A government-backed loan helped
sustain it and as prices rebounded, Bonterra repaid the loan,
along with C$150 million in debt during the past year as of the
third quarter.
    Bonterra expects to pay off its remaining C$38 million bank
debt by the third quarter 2023, and still have options like
initiating a dividend, raising production or repaying debt
further, Chief Executive Officer Pat Oliver told Reuters.
    "It's been a radical transformation of balance sheets over
the last couple of years, an amazing turnaround from where we
were," Oliver said.
    Canadian Natural Resources  CNQ.TO , the country's biggest
oil producer, said on Nov. 30 that it will raise shareholder
returns to 80% to 100% of free cash flow from 50%, once it
reduces net debt to C$8 billion. An analyst said this would
likely happen late next year. 
    The TSX energy index  .SPTTEN  has generated 46% year to
date as of Thursday, though down 17% since peaking in June. The
benchmark Canadian share index  .GSPTSE  is down nearly 6% for
the year.
    "There was a higher debt-load going through COVID, and now
(producers) have got options," said Ryan Bushell, President of
Newhaven Asset Management, which holds shares in Canadian
Natural and ARC Resources Ltd  ARX.TO . 
    Producers generated big profits due to high prices this year
fuelled by Russia's invasion of Ukraine. Prices have since slid
to around $72 per barrel from a 14-year high of $130.50 in
March. Canadian producers also absorb a $29 per barrel discount
due to distance from U.S. refineries and lower heavy oil demand.
    That discount may worsen after the Keystone oil pipeline
shut down on Wednesday.
    If oil prices dip below $65, companies may tighten spending
but opt to reduce capital budgets before shareholder returns,
Bushell said.
($1 = 1.3599 Canadian dollars)
 (Reporting by Rod Nickel in Winnipeg; Editing by Josie Kao)
 ((rod.nickel@tr.com; Twitter: @RodNickel_Rtrs;))