Ryan Bushell

As you can see from the prices below a 15-20% drop since 2013 for Canadian producers is hardly the same as the ~50% drop that most people assume.  Additionally the ~35% drop for US producers is clearly worse for marginal shale economics especially when you consider the fact that US royalties are usually flat where as Canadian royalties tend to float up and down with prices.  The increase in well productivity and drop in service costs for new wells versus 2-3 years ago mitigates the commodity price drop significantly as well such that when you apply this analysis back to 2012 you can see that Canadian producers are arguably better off.

June 2015

Grade

USD Price

CAD Price

USD Differential

WTI

$60.23

$0.81

CAD/USD

Synthetic (upgraded bitumen)

$60.88

$75.16

0.65

Edmonton Par (CAD Light)

$60.16

$74.27

-0.07

WCS (CAD Heavy)

$49.88

$61.58

-10.35

                                                                                            (Source: Thomson Reuters)

June 2013

Grade

USD Price

CAD Price

USD Differential

% Difference Today

WTI

$92.37

$0.97

CAD/USD

-33.4% USD

Synthetic (upgraded bitumen)

$91.81

$94.85

-0.56

-20.8% CAD

Edmonton Par (CAD Light)

$86.18

$89.03

-6.19

-16.6% CAD

WCS (CAD Heavy)

$72.96

$75.37

-19.41

-18.3% CAD

                                                                                                                                                                (Source: Thomson Reuters)

June 2012

Grade

USD Price

CAD Price

USD Differential

% Difference Today

WTI

$83.98

$0.96

CAD/USD

-29.3% USD

Synthetic (upgraded bitumen)

N/A

N/A

N/A

N/A

Edmonton Par (CAD Light)

$74.86

$71.95

-9.12

+3.2% CAD

WCS (CAD Heavy)

$65.20

$62.66

-18.77

-1.7% CAD

                                                                                                                                                              (Source: Thomson Reuters)

Now lets look at share prices/dividends of our current holdings for the same timeframe:

Company

Current Price

June 2013

% Difference

June 2012

% Difference

Change in Dividend

Change in Yield

Cenovus

$21.10

$30.84

-31.6%

$31.54

-33.1%

+21%

+79%

Crescent Point

$27.39

$37.54

-27.0%

$38.49

-28.8%

0%

+42%

Encana

$14.85

$18.00

-21.2%

$19.95

-25.6%

-65%

-44%

Canadian Natural Resources

$36.24

$29.83

+22.5%

$28.09

+29.0%

+119%

+42%

Baytex Energy

$20.64

$43.26

-52.3%

$42.81

-51.8%

-54%

-4%

Freehold Royalties

$16.92

$23.51

-28.0%

$18.40

-8.0%

-36%

-30%

Shawcor

$37.59

$41.98

-10.5%

$32.58

+15.4%

+50%*

+30%

*Paid a special dividend of $1/share in 2013 which is not included                             (Source: Thomson Reuters)

As you can see all but Shawcor and Canadian Natural Resources share prices are down significantly for the 3 year period despite better economics by and large for the whole group and dividends that are largely in tact.  This is the definition of sentiment detaching from fundamentals and represents an opportunity.  In almost all cases dividend yields are higher today than they were 3 years ago despite arguably better economics/pricing.

Conclusion: The oil price drop has been painful in the near term, however the impact to dividends for Canadian producers is contained provided things don’t get worse.  US producers are hurt more than Canadian producers which should help to alleviate supply side growth to some extent.  Canadian producers are very competitive with US producers, especially when higher average US decline rates and royalties are factored in.  Sentiment has detached from fundamentals; a dollar invested in our energy holdings today earns us more dividend income than it did 3 years ago, driving our continued commitment to the space.

 

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