Canadian Oil Stocks Gifted Cash Flow `Windfall’ Amid Crude Rally

Crude’s rally is a boon for Canada’s integrated oil companies, and BMO Capital Markets is urging investors to increase their exposure to cash in on the dividends and buybacks the windfall may bring.

“The surge in crude oil prices is creating a cash flow windfall for many companies. At a WTI price of $55/bbl and WTI-WCS differential of $20/bbl, we expect the Canadian large cap companies to collectively generate C$11 billion of surplus cash flow in 2019,” BMO said.

Additionally, at current WTI crude prices around $65 per barrel and a $10 per barrel WTI-WCS differential, the surplus cash flow “balloons” to C$17 billion, which is “well above the current consensus estimate of C$10.5 billion,” analyst Randy Ollenberger told clients in a note this week. And unlike past cash inflows, the bank isn’t expecting a boost in capital spending from a surplus, but rather dividend growth and higher levels of stock buybacks.

Crude oil has gained over 45 percent this year, while Canada’s main gauge energy index has advanced more than 21 percent during the same period. One of BMO’s top picks — Cenovus Energy Inc. — has rallied over 44 percent.

“With the recent move up in prices the underperformance gap is getting wider. As a result, the group’s valuation continues to become more compelling versus the broader market and historical valuation levels.” Ollenberger said, whose top picks include Cenovus, Encana Corp., and Suncor Energy Inc.