Analysis: Debt, dividend fears crush Canada's oil stocks

Fri Sep 30, 2011 5:11pm EDT
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By Scott Haggett and Jeffrey Jones

CALGARY, Alberta (Reuters) - A combination of falling oil prices and debt levels better suited to headier days is hammering Canadian oil and gas shares as investors fret that growth prospects are shriveling.

The steep drop in shares of PetroBakken Energy Ltd PBN.TO this week may be just the start of similar moves across the sector as the outlook for cash flows gets squeezed, putting dividends and capital spending at risk.

"The market is hypersensitive about any bit of bad news right now," said Andrew Potter, an analyst at CIBC World Markets. "Any company with an operational upset is going to get hit disproportionately. Any company with a sniff of financial risk is being hit. The market is very sensitive about all these things right now."

The Toronto Stock Exchange oil and gas group has fallen 28 percent in the past four months, an even more pronounced drop than has hit oil prices. In the same period, U.S. benchmark crude is down 20 percent.

The nervousness was highlighted on Thursday by the panicked selloff of shares of PetroBakken, a Saskatchewan oil producer. The stock skidded on fears the company might have to suspend a rich dividend because of the weaker oil prices.

Many energy companies began the year predicting they would generate enough excess cash flow to make healthy regular payouts on top of money needed for exploration and development. Some had gone to the debt market to top up capital spending plans.

But oil prices have fallen as Europe's debt crisis and a intractably weak U.S. economy have raised fears that a return to global recession would drive down demand. The higher debt levels on corporate balance sheets look more risky against expectations of reduced cash flow.

The gloomier outlook has already convinced some companies to trim spending before debt becomes a concern. Encana Corp (ECA.TO: Quote), weathering a prolonged slump in natural gas prices, has said it will not boost its debt next year, keeping its spending at or below its cash flow.   Continued...