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Energy stocks to keep gushing payouts: Bay Street money managers

Bay Street money managers say investors in Canadian energy stocks can expect more dividend increases and share buybacks as major oil and gas companies start reporting fourth-quarter financial results this week.

Imperial Oil (IMO.TO)(IMO) is set to kick off the latest round of earnings from the Canada’s oil patch Tuesday morning, followed by Suncor (SU.TO)(SU) late Wednesday evening.

The results come as benchmark oil prices head for their strongest January performance in at least 30 years, with global supply struggling to match rising demand. The price of West Texas Intermediate (CL=F) climbed above US$87 per barrel on Monday. It’s a far cry from the first months of the COVID-19 pandemic, when prices briefly fell into negative territory.

Canadian energy stocks have seen a strong performance in 2022. The iShares S&P/TSX Capped Energy Index ETF, a basket of major Canadian oil and gas producers, has climbed more than 15 per cent this month.
Canadian energy stocks have seen a strong performance in 2022. The iShares S&P/TSX Capped Energy Index ETF, a basket of major Canadian oil and gas producers, has climbed more than 15 per cent this month.

Rising free cash flow yields have spurred many energy producers to share the wealth with investors via dividend hikes, special payouts and accelerated share buyback programs. Michael Sprung, managing partner at Toronto-based Sprung Investment Management, expects the rewards to continue to flow in 2022 as companies benefit from higher commodity prices, and economies attempting to reopen.

Most oil companies are going to be announcing earnings that will surprise to the upside.Michael Sprung, managing partner, Sprung Investment Management

“Most oil companies are going to be announcing earnings that will surprise to the upside. I think we’re going to see some more buybacks going forward,” he said in an interview. “I wouldn’t be surprised to see US$100 oil in the next year or so.”

Greg Taylor, chief investment officer at Toronto-based Purpose Investments, sees long-term strength in Canadian energy, a corner of the market he described two years ago as “one of the most-hated sectors out there, and most under-owned.” He says years of pressure to invest in greener forms of energy has caused under investment in oil and gas production, making it tough for producers to quickly ramp up supply.

“Now, when we’re getting increased demand, and people are potentially opening up economies, and bringing flights and travel back, it’s not like it was before, when you could bring on a ton of new production,” he said in an interview.

“I think the fact that a lot of people had written [the Canadian energy sector] off a few years ago is really going to contribute to a number of years of really outstanding growth and earnings for these companies,” Taylor added. “It’s going to cause a lot of pain for those that have taken the easy route of writing off [fossil fuel] energy from an ESG point of view.”

Speaking to his expectations for more shareholder rewards, Taylor points to Tourmaline Oil (TOU.TO). The Calgary-based producer announced an 11 per cent increase to its base dividend earlier this month, as well as its second special dividend since October 2021. Purpose holds Tourmaline shares in several of its funds.

“I have to wonder if other companies are going to take note of this when they’re deciding what to do with their cash,” Taylor said. “That seems to be the more preferred route for investors, versus spending on capital expenditures and M&A.”

The iShares S&P/TSX Capped Energy Index ETF (XEG.TO), a basket of major Canadian oil and gas producers, has climbed more than 15 per cent this month, building upon a triple-digit return over the past year.

Sprung says his favourite names in the oil and gas sector include Vermilion Energy (VET.TO)(VET), Suncor, Canadian Natural Resources (CNQ.TO)(CNQ), and ARC Resources (ARX.TO), all of which he owns for clients.

Correction: A previous version of this story incorrectly stated the timing of Suncor's fourth-quarter financial results.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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