The ability of Canadian oil producers to lure investors with generous dividends is being tested as cash flow is squeezed by crude trading near five-year lows.
Canadian Oil Sands Ltd. (COS) will cut its quarterly dividend 42 percent to 20 cents a share in late January, the Calgary-based company said in a 2015 budget forecast statement today after the close of North American markets. Companies will have to choose between reducing spending or payments to shareholders, said Sprott Asset Management LP’s Eric Nuttall.
“The true sustainability of the dividend model at current oil prices in Canada is highly challenged,” said Nuttall, who oversees C$120 million ($106 million) at Sprott in Toronto. He predicted capital spending will fall 15 percent next year and dividend reductions may follow if prices stay low. “The current oil price does not work for the industry.”
Canadian energy companies, such as Baytex Energy Corp. (BTE) with average dividend levels higher than their U.S. peers, are grappling with tough choices after oil fell as much as 40 percent from its high in June. The plunge accelerated last week after OPEC committed to maintaining its current output target amid a supply glut and a global battle for market share.