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How to spend a resource sector financial windfall

Resource company shareholders rewarded with dividends, buybacks
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West Fraser has used some of its surplus cash to close acquisitions in 2021, including US$300 million for a lumber mill in Texas and Allendale OSB mill, and US$280 million for an oriented strand board mill in South Carolina.

While many businesses’ profits have been eroded by extraordinary economic shocks – pandemic lockdowns, supply chain disruptions, natural disasters, high inflation, an energy crisis in Europe – certain resource sector companies have prospered over the past two and a half years. And some have netted record-breaking profits.

B.C. lumber producers that posted losses in 2019 recorded healthy profits in 2020 and, in some cases, unprecedented profits in 2021 thanks to high demand and record-high lumber prices. Oil and gas producers saw balance sheets go from red in 2020 to black in 2021 and 2022, due to soaring oil and natural gas prices.

Miners like Teck Resources Ltd. – which recorded a nearly $1 billion loss in 2020 – saw profits double in 2021, and posted record quarterly profits in 2022’s second quarter, thanks to high copper and metallurgical coal prices.

Companies that used windfall profits to reward shareholders with share buybacks caught the attention of both the Joe Biden and Justin Trudeau governments, and both implemented new taxes on share buybacks.

Ottawa’s new tax is intended to encourage companies experiencing windfall profits to reinvest, rather than spend it all on bolstering their stock ownership and rewarding shareholders.

While the tax seemed to be mainly aimed at big banks and oil majors, both of which have pocketed some record profits over the past 18 months, other resource companies have also profited from high commodity prices, including miners and lumber producers. They too will be hit with the new tax, should they continue to use share buybacks as a way of keeping and rewarding shareholders.

But the Biden and Trudeau governments are sending some mixed messages to resource companies, which are being told to reinvest their record profits and, simultaneously, to take their business elsewhere.

The oil and gas sector has been explicitly told that new oil wells and pipelines are not wanted in many parts of Canada and the U.S. Canadian forestry majors have increasingly sent capital outside the country, as producing regions like B.C. become increasingly more costly. Even fossil-fuel-loving Alberta has been discouraging investments in new metallurgical coal mines.

“Forestry firms have been buying back shares, investing for growth either organically or purchasing sawmills and paying down debt,” said Paul Quinn, forest sector analyst for RBC Dominion Securities. “What is interesting is that the vast majority of this investment is outside B.C.

“On the lumber side, B.C. has moved from the lowest-cost area in North America to the highest-cost jurisdiction over the last 15 years. The reality is that the harvest level declines will lead to more mill closures. Why would any rational company invest in this climate? Increasing taxes will only serve to drive away investment in the province.”

As for the implication that resource companies are inflation profiteers, Kin Lo, accounting professor at the University of British Columbia’s Sauder School of Business, notes that recent resource company windfalls need to be weighed against the fact that commodities are cyclical.

“Both forestry and mining companies have experienced low commodity prices in the recent decade, so we do need to look at the profit levels over a longer period of time to get a sense of whether companies are earning windfall profits,” he said.

In 2020, oil and gas companies recorded major losses, after oil prices fell from US$60 per barrel for West Texas Intermediate to US$20. In 2019, forestry giants posted negative earnings as a result of high log costs and low lumber prices.

The windfalls that some companies enjoyed over the last couple of years may not be repeated in 2023. Commodity prices are now signalling an economic slowdown.

In 2022’s second half, record high lumber prices fell back to earth, with a 42 per cent drop over the summer, and forestry majors have posted recent third-quarter financials with lower sales and profits.

Oil prices last week also fell by eight per cent between Nov. 15 and Nov. 18 on fears of a weakening Chinese economy, and the shine has come off copper somewhat, with prices declining 17 per cent from a year ago.

How B.C. resource companies spent their windfalls

West Fraser Timber Co., B.C.’s largest publicly traded forestry company by market capitalization ($9.5 billion) had record sales of US$10.5 billion and earnings of US$2.9 billion in 2021. That’s double the company’s earnings in 2020, when it had sales of US$4.4 billion and earnings of US$588 million.

The 2021 profits were not solely the result of high lumber prices, however. The company grew substantially in 2021, after it concluded a US$3.1 billion acquisition of Norbord. In 2022’s first nine months, West Fraser had sales of US$8 billion and earnings of US$2 billion. (The company now reports in U.S. dollars, following the acquisition.)

In 2021 and the first nine months of 2022, West Fraser bought back US$3.191 billion of its shares and issued US$149 million in dividends.

West Fraser has used some of its surplus cash to close acquisitions in 2021, including US$300 million for a lumber mill in Texas and Allendale OSB mill, and US$280 million for an oriented strand board mill in South Carolina.

West Fraser’s top five executives received a total of $4 million in bonuses in 2021, with CEO Ray Ferris receiving $1.65 million – a $650,000 increase over the previous year’s bonus. 

Teck Resources, B.C.’s biggest mining company, had record revenues of $13.5 billion and a record profit of $2.9 billion in 2021, thanks to high copper and metallurgical coal prices, leaving it with free cash flow of $4.7 billion.

That compares to revenue of $8.9 billion in 2020 and a loss of $944 million, thanks to a $1.2 billion impairment on its share of the Fort Hills oil sands project, which was plagued by high capital costs and low oil prices.

In 2021, Teck earned $1.7 billion on copper – more than double what it earned in 2020 – thanks to high copper prices, as well as $2.5 billion from high metallurgical coal prices.

The same year, Teck spent $4 billion on capital expenditures, $335 million to repay revolving credit facilities and $106 million on dividends. As of the third quarter of 2022, Teck had rewarded shareholders with $1.4 billion in share buybacks and $468 million in dividends.

Teck’s top five executives received $6 million in bonuses in 2021, with former CEO Don Lindsay receiving $3 million in bonuses. 

Parkland Corp., a Calgary-based fuel retailer and convenience store owner, owns the oil refinery in Burnaby that supplies the Lower Mainland with much of its gasoline and diesel. 

The company profited from high gasoline and diesel prices in 2021, though its costs were also higher, due to high oil prices.

Parkland reported $21 billion in sales in 2021 (with costs of $19 billion) and net earnings of $162 million, compared with sales of just $14 billion in 2020 and net earnings of $154 million.

In the first nine months of 2022, Parkland had sales of $26.8 billion, and net earnings of $277 million.

Parkland issued $190 million worth of dividends for 2021, but did no share buybacks. The company has made $2 billion in investments over the past two years, including a network of 25 ultra-fast charging stations for electric vehicles in B.C. and Alberta, and the $322 million acquisition of M&M Food Market.

Parkland’s top five executives received $3.6 billion in bonuses in 2021, with CEO Robert Espey receiving $1.3 million. They received only $1.1 million in bonuses in 2020, with Espey receiving $500,000. 

Methanex Corp. is a Vancouver-based methanol maker, with methanol plants in Canada, the U.S., New Zealand, Chile, Trinidad and Egypt.

The economic contraction of the pandemic in 2020 resulted in a dramatic decline in the sales of methanol, which is used in many chemical processes and also as a low-carbon fuel.

The company posted a US$157 million loss in 2020. A rebounding global economy in 2021 increased global methanol demand by five per cent, boosting the company’s sales to US$4.4 billion, and net income to US$482 million.

In the first nine months of 2022, Methanex had revenue of US$3.3 billion, and net income of US$313 million.

Methanex issued dividends of US$25 million in 2021 and bought back US$63 million worth of shares. In 2022, as of the third quarter, Methanex had rewarded shareholders with US$44 million in dividends and share buybacks. The company allocated US$173 million to pay off debt on its Geimar3 expansion project in Louisiana. 

The company’s top five executives made US$9.7 million in bonuses in 2021, with CEO John Floren receiving US$3.3 million. Floren received no bonus in 2020. 

nbennett@biv.com

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