If they didn’t know it before, investors around the globe have quickly found that collapsing oil prices negatively impact sectors beyond energy, and much of this pain has been felt within the infrastructure, equipment and services spaces.
These segments from the market benefited immensely from surging growth in unconventional resources plays like the Alberta Montney and Texas Eagle Ford, as well as relatively simple use of cheap capital in recent years.
Investors piled in because of the attractive yields and consistent dividend hikes many of these stocks offered. Of course, everything has changed.
“The collapse of commodity prices has created a number of stresses on producers and infrastructure companies,” Paul Lechem, an analyst at CIBC World Markets, told clients.
He noted that the most vulnerable companies are those with high levels of direct commodity exposure, high dividend payout ratios, and limited free cash to finance growth internally.
“The dividend growth story for a lot of from the energy infrastructure companies is increasingly doubtful,” Lechem warned.
Kinder Morgan Inc.’s 75 percent dividend cut, which allowed it to narrowly avoid a credit score downgrade, is one prime example of the sector’s woes.
Williams Cos. Inc. wasn’t in a position to escape that fate, as its high leverage along with other challenges first viewed it downgraded to non-investment grade.
Times are indeed tough for Canadian players, but Lechem believes the prospects are better than for their U.S. counterparts. That’s mainly due to their lower dividend payout ratios, strong counterparties, lower direct commodity exposure and stronger credit scores.
In relation to commodity exposure, the analyst noted that Canada’s regulated utilities for example Algonquin Power & Utilities Corp., Emera Inc., Fortis Inc. and Hydro One Inc. fall at the cheap from the risk spectrum.
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Pipeline the likes of Enbridge Inc., Inter Pipeline Ltd., Spectra Energy Corp. and TransCanada Corp. are considered more dangerous, with power companies such as Capital Power Corp., Northland Power Inc., TransAlta Renewables Inc. and TransAlta Corp. coming in at the higher end of the risk scale.
Capex reductions in the oil sector paint a great picture of how depressed activity is really.
J.P. Morgan’s survey of actual spending plans points to a 23 percent year-over-year decline for exploration and production companies globally in 2016.
This follows a 21 percent pullback in 2015, implying 2016 will see a roughly 60 per cent decline in the peak in 2014.
Independent U.S. E&Ps are at the forefront in terms of cuts, coming in at 53 percent year-over-year, but they’ve were able to reduce oil production by only nine percent.
The Middle East and North Africa region is set to make the smallest capex cuts at approximately 10 per cent in 2016, while reductions in Canada are anticipated to be about 30 percent.
“A halving of U.S. independent capex budget cuts in 2016 represents an unwinding of over ten years of spending growth to levels last observed in 2003,” J.P. Morgan analyst Sean Meakim said inside a research note. “Meanwhile, E&P calls for another round of capital efficiency imply not only more pain in 2016, but and the higher chances to the timing and degree of an eventual recovery in activity.”
While Meakim recommended that investors use rallies to reduce their positions, he did highlight some areas of relative safety, where value are available for investors.
The analyst suggested leaning towards higher quality and enormous companies, with Schlumberger Ltd. and Halliburton Co. top chioces among large caps due to their strong execution and balance sheets, and fairly sustainable free income profiles – a rarity within the energy space today.
Among small and mid caps, the analyst likes MRC Global Inc., Nabors Industries Ltd., Superior Energy Services Inc. and Tetra Technologies Inc.
