During the last few weeks, as the recent market strength has stalled and corrected, several Canadian oil and gas companies have come under intense selling pressure. Much of this negative pressure comes from a bottleneck issue, where many Canadian energy companies were designed to service the U.S. market through already tight pipelines. Another key issue is that many Canadian energy equities contain significant natural gas exposure.
Both the natural gas' bottoming process and the denial of the keystone pipeline have inclined investors to exit positions in Canadian oil & gas equities. Canada supplies more oil and gas to the United States than any other foreign nation, but Canada has more gas than it supplies to the United States. Over time, it is expected that a growing amount of both oil and gas might find its way to western Canada for export to China, but such transfers take time. Additionally, any continued natural gas supply increases will likely further affect price.
The Canadian dollar is primarily natural resource-backed. In 2011, the Canadian dollar fell against the U.S. dollar, but from its recent high-- which it is still somewhat near. The Canadian dollar largely follows the price of gold, oil and other natural resources abundant in Canada. The Canadian dollar continues to trade at or near parity with the U.S. dollar, which is historically strong.
Below is a recent performance table for six high yield Canadian oil and gas equities that trade within the United States (listed in alphabetical order): Baytex Energy Corp. (BTE), Cenovus Energy Inc. (CVE), Enbridge Inc. (ENB), Enerplus Corporation (ERF), Pengrowth Energy Corporation (PGH) and Penn West Petroleum Ltd. (PWE). I have included their one-week, one-month and 2012-to-date equity performance rates, as well as their current yields.
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Over the last month, the above-listed equities averaged a decline of 11.44 percent, and the group now averages a decline of 10.1 percent since the start of the year, not counting dividends paid. All of these companies provide above-average dividends compared to the broader market, but the higher yielding equities of those listed have generally underperformed the lesser yielding equities recently.
Natural gas prices have trended lower for several years, with new technology increasing gas supplies far faster than demand growth for gas. Most Canadian oil and gas equities followed oil and gas price fluctuations, and haven't changed their dividend policies in several quarters. Recent low gas prices have caused some investors to question the sustainability of several of these lofty dividends. On April 12, PGH reported its monthly dividend, which it did maintain at 7 cents, where it has kept its monthly payout since the Fourth Quarter of 2009.
Most Canadian oil and gas companies were Royalty Trusts ("CanRoys") before changes in Canadian law eliminated them. These trusts were similar to U.S. MLPs in that they avoided corporate taxation by passing most of their income to shareholders. After Canada eliminated these trusts, most converted into corporations. Some may need to further restructure themselves or reduce their dividends in the coming quarters, as many have tax credits that will eventually expire.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.
Disclosure: I am long PGH.
