A pumpjack draws out oil from a well head near Calgary in 2022.Jeff McIntosh/The Canadian Press
Energy is a fickle beast. When things are going well, they go very, very well. When they go bad, it’s horrid.
Horrid, as in oil prices going to zero. That happened in April, 2020, at the onset of the COVID-19 pandemic. The impact on the economy was devastating. Demand for oil fell through the floor and there were inadequate storage facilities to hold new production. As a result, the price of a barrel of some Western Canadian crude fell below $0. They were giving it away!
Think about that the next time you pull into a gas station. You’ll be lucky if the price doesn’t change before the tank is full.
Of course, we’re in a different phase of the cycle. U.S. President Donald Trump’s folly in Iran has changed the structure of the industry, with the closing of the Strait of Hormuz. Oil prices are near all-time highs, and some countries have imposed rationing. If the conflict doesn’t end soon, some analysts predict prices could hit US$200 a barrel!
If you’re a consumer, things couldn’t be worse. If you’re a producer outside the Middle East, they couldn’t be much better. You can sell your product at world prices, without fear of blockades or air strikes.
Investors can look at this in two ways. The prices of most energy stocks have gone up, which looks good on the bottom line of your brokerage statement. But companies haven’t matched windfall profits with comparable dividend increases – meaning yields have dropped.
There are still good sources of cash flow in the energy sector. But choose carefully and remember that some companies may be quick to cut their payouts if things flip again. Your goal should be consistency, so do your research before committing any funds.
Income investors should focus on companies with a long history of steady or rising dividends. Those with a track record of frequent ups and downs should be approached with caution.
Here are three high-yield Canadian energy performers from my Income Investor recommended list. Prices are as of May 15.
Gibson Energy Inc. (GEI-T)
Current price: $28.92
Originally recommended: Oct. 14/21 at $23.00
Annual payout: $1.80
Yield: 6.2 per cent
Comments: Gibson Energy is a Calgary-based liquids infrastructure company. Its principal businesses consist of the storage, optimization, processing and gathering of liquids and refined products. The company’s main operations are located at Edmonton and Hardisty, Alta., and in Ingleside and Wink, Tex. Gibson also has a facility in Moose Jaw, and infrastructure in the United States. The stock has been on our recommended list since 2021.
The shares have a solid dividend history. At the time of our 2021 recommendation, they were paying 35 cents per quarter. There have been five increases since, and we’re now at 45 cents a quarter, for a yield of 6.2 per cent.
In fact, Gibson has never cut its dividend. There was a long period when it was stuck at 33 cents (March, 2016, to March, 2020), but at no time was it reduced. That’s a strong encouragement for people who depend on steady cash flow to survive.
Keyera Corp. (KEY-T)
Current price: $57.44
Originally recommended: July 21/04 at $6.03 (split-adjusted)
Annual payout: $2.16
Yield: 3.8 per cent
Comments: Keyera is primarily in the natural gas and natural gas liquids business, providing such services as gathering, processing, fractionation, storage, transportation and marketing. It does not do any exploration or production.
This is another reliable dividend payer. It has not reduced its dividend since 2003 and normally increases it annually.
Pembina Pipeline Corp. (PPL-T)
Current price: $67.35
Originally recommended: June 23/09 at $14.78
Annual payout: $2.84
Yield: 4.2 per cent
Comments: This Calgary-based company owns pipelines that transport hydrocarbon liquids and natural gas products produced primarily in Western Canada. It also owns gas gathering and processing facilities and an oil and natural gas liquids infrastructure and logistics business.
During the darkest days of the pandemic, Pembina’s board insisted the dividend would be protected at all costs. The market thought otherwise, and the share price fell from the $50 range to about $15 in early 2020. The company held firm and the shares have been on an upward track ever since.
Now let’s look at two energy companies that react quickly to market changes.
Freehold Royalties Ltd. (FRU-T)
Current price: $17.81
Originally recommended: Oct. 28/21 at $12.10
Annual payout: $1.08
Yield: 6.1 per cent
Comments: Freehold is a Calgary-based energy company focused on acquiring and managing oil and natural gas royalties in Canada and the U.S. It has a portfolio of about six million gross acres in Canada and 1.2 million in the U.S., producing from over 21,000 wells. Freehold owns the mineral rights but does not operate the wells, incurring no capital costs for drilling or equipment, allowing it to pay monthly dividends.
Currently, those dividends are 9 cents a month ($1.08 a year) for an attractive yield of 6.1 per cent. But the company has a history of slashing its payout in tough times. Most recently, it sliced the dividend by more than 70 per cent in the early stages of the pandemic. It took about 18 months for it to recover to above prepandemic levels.
Peyto Exploration & Development Corp. (PEY-T)
Originally recommended: Dec 22/22 at $13.30
Current price: $26.79
Annual payout: $1.32
Yield: 4.9 per cent
Comments: Alberta-based Peyto is one of the top 10 gas producers and processors in Canada. The company focuses on exploring and producing unconventional natural gas in western Alberta’s Deep Basin. As one of Canada’s lowest-cost natural gas producers, Peyto is known for its efficient, high-margin operations.
The current monthly dividend is 11 cents a share, providing a yield of 4.9 per cent. But history suggests that if petroleum prices drop after the Iran war, Peyto’s dividend may follow. In June, 2020, the company reduced the payout to 1 cent per quarter from 2 cents per month. That was bumped up to 5 cents a month in November, 2021, and to the current 11 cents a month in January, 2023. There were previous dividend cuts in December, 2010, and February, 2009.
Bottom line: If your primary interest is steady cash flow, take a close look at the dividend history of any company (energy or otherwise) in which you’re interested.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.