The Suncor Refinery in Edmonton is seen on April 29, 2014.JASON FRANSON/The Canadian Press
Suncor Energy Inc. chief executive Mark Little says cutting the company’s prized dividend would have been inconceivable just three months ago. But the toll on Suncor’s finances due to the COVID-19 pandemic and global oil price crash quickly made it a question of when to cut, not if.
Canada’s largest oil sands producer reduced its quarterly dividend by 55 per cent, to 21 cents a share, as it reported a $3.5-billion net loss for the first quarter. Suncor is the first to cut among a trio of large, well-funded Canadian oil producers with records of steadily increasing dividends that had been seen as iron-clad.
“Given this incredible circumstance that’s having huge global implications, we view this as very important that we be pro-active. And this is very prudent in managing the financial strength of the company so that we can keep the company strong through this and not continue to take on debt,” Mr. Little told analysts in a conference call on Wednesday.
The reduction saves Suncor $1.6-billion, and lowers its break-even U.S. benchmark oil price to US$35 a barrel from US$45, as the company plans for tough times in the industry to last throughout 2020. The worst of the plunge in petroleum demand and oil prices is expected this quarter. West Texas Intermediate crude fell 2.3 per cent to US$23.99 a barrel on Wednesday, following five straight sessions of gains.
Crescent Point reports $2.32-billion loss due to plunge in oil prices
Iraq struggling to implement OPEC’s record oil supply cut: sources
Oil dives more than five per cent, below $30 a barrel as glut grows
Oil markets have strengthened this month as governments seek to kick-start their economies by allowing businesses to reopen. However, the oil industry’s future remains murky because of a massive buildup in inventories of crude oil and petroleum products over the past two months, and worries about the potential for waves of new coronavirus infections to stall recovery.
Suncor also gave itself some breathing room by reducing its capital spending by another $400-million, bringing the total reduction from its initial budget for 2020 to $1.9-billion.
Among global oil majors, Royal Dutch Shell PLC last week reduced its dividend for the first time since the Second World War, citing the drop in fuel consumption brought on by restrictions on movement to combat COVID-19. As for the largest Canadian players, Imperial Oil Ltd. has left its dividend intact for now. But with Suncor having reduced its payout, investors are wagering whether Canadian Natural Resources Ltd. – another company with an unblemished record of dividend increases – will follow suit.
Chris Cox, an analyst at Raymond James, pegged the chances of Canadian Natural doing so at 50-50, saying the company could wait to see how the next two months play out in energy markets. Canadian Natural is scheduled to report its results on Thursday.
“It’s one of those things that no one would have expected prior to this downturn, but this is a sign of how severe this is,” he said.
Cenovus Energy Inc., Crescent Point Energy Corp. and Vermilion Energy Inc. are among many Canadian producers that have suspended or nearly eliminated their dividends to deal with the crisis that at one point last month pulled the price of oil futures below zero for the first time.
“It’s prudent for Suncor because they would have been funding the dividend entirely from their balance sheet, and so we think it makes a lot more sense to not add debt in this current price environment,” Mr. Cox said. “It insulates their balance sheet so they are better positioned coming out of the downturn.”
The company’s share price fell 3.4 per cent to $22.50 on the Toronto Stock Exchange on Wednesday. The stock is down by nearly half this year.
Mr. Little said Suncor’s executives debated whether to chop the dividend now, or wait until the end of the second quarter. The likelihood of a reduction later was deemed very high, given the market rout, so Suncor decided to make the cash available, he said.
“There’s absolutely no question that the second quarter will be more challenging than the first quarter both in the upstream and downstream sides of the business. So as we see improving market conditions and such, yes, that’s happening, but it’s from the low of the low,” Mr. Little said.
Suncor’s net loss included $3.2-billion of non-cash asset impairment and foreign exchange charges. Its operating loss was $309-million, compared with an operating profit of $1.2-billion in the first quarter of 2019.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.