Category: DCOG Index

I will be terminating the Divestor Canadian Oil and Gas Index (DCOGI) effective today.  It took a bit too much effort to administrate (the dividends, in particular, were cumbersome) and also this might be a signal the fossil fuel trade is nearly over.

The DCOGI was created on February 5, 2021 with a hypothetical million dollars invested among 9 very well known Canadian oil and gas companies, with the larger companies having more weighting.

From an index level of 100 at February 5, 2021, the DCOGI ended 2022 at 283.9.

The comparators were the energy ETFs XEG.to, ZEO.to and the broad-based index ETF VCN.to.

XEG ended at 257.5;
ZEO ended at 209.6;
VCN ended at 113.2.

These values are all with one dividend reinvestment cycle at the end of 2021, otherwise for 2022 the cash from dividends accumulated yield-free.

In 2022, the DCOGI had an 11.9% cash yield based off of its initial cost, an indication of the incredible amounts of cash flow that have been spun off by this sector (the primary contributor to this was Tourlamine’s special dividends, with CNQ as a close second).

2023 should also feature, if indications suggest, that increased cash yields will be coming from ARX, BIR, CVE, PEY and WCP in relation to 2022.

I will leave the final spreadsheet here in case if anybody wants to continue the work, but otherwise it will be kept in an unmaintained state.

 

 

This is a quick refresh of the Divestor Canadian Oil and Gas Index (DCOGI), created on February 5, 2021.

From a notional 100 value on February 5, 2021, it ended Q3-2022 at 248, working out to a 74% CAGR.

It has fared well against its ETF competitors, XEG (index: 227) and ZEO (index: 192), although the latter has 40% pipelines and will be lower return and should be lower risk by design. Both ETFs, however, have a 60bps friction involved in the form of MERs.

The DCOGI has suffered its first quarterly loss, losing 4.5% for the quarter. Perhaps when WTI crude goes from CAD$130 to CAD$110/barrel had something to do with it (not to mention the increasing WCS-WTI differential).

Of note is that dividends received year-to-date in the DCOGI have amounted to 8.2% of the original cost base. This will likely increase in the future as Birchcliff Energy has indicated they will raise their dividend from 2 cents to 20 cents quarterly starting in 2023, and I speculate Cenovus will probably double theirs at the same time. CNQ and Tourlamine have given special dividends, while ARC and Whitecap will continue to raise as they achieve specific net debt amounts.

The only dividend holdout is MEG Energy, which continues to buy back its own debt at a frantic pace from the open market – at quarter-end they disclosed a US$97 million debt purchase of their 7.125% 2027 notes. Of note is that this issue was US$1.2 billion at the end of Q1 and at the end of Q3 is US$735 million outstanding. They have a stated capital allocation goal to dedicate 75% to debt retirement and 25% to share buybacks until their net debt goes below US$1.2 billion, after which they will go to a 50/50 model. They will transition to 50/50 sometime in the 4th quarter.

The Divestor Canadian Oil and Gas Index (DCOGI) was created on February 5, 2021. You can view the index here.

Currently the DCOGI is up with a total return of 72%, with the nearest ETF comparators, XEG, ZEO and VCN, up 61%, 45% and 17%, respectively.

In the initial index construction, there was no contemplation of re-balancing or re-investment of dividends.

So far, the index has accrued 3.4% of its initial value in the form of cash and by year-end this will be around 3.5%. Likewise, XEG/ZEO/VCN will have accumulated substantial cash on their notional accounts.

Accordingly, I will be revising the reinvestment policy to a yearly deployment of accumulated cash.

On the first trading day of the year (January 4, 2022), the accumulated cash will be re-deployed in the 9 constituent components in the proportion of the original index construction.

As a reminder, this is:

20%: CVE, CNQ, SU
10%: TOU, WCP
5%: ARX, BIR, MEG, PEY

The opening price will be the price received on the dividend reinvestment. This also applies to XEG/ZEO/VCN, where cash dividends accumulated in the year will be applied to their own units to the maximum extent possible. This will happen on an annual basis going forward.

Also, at this time, while it has not occurred yet, if there is a merger/acquisition of one of the constituent components that involves an election, the election will be as equity-oriented as possible. If a DCOGI component is removed as a result, any future re-investment will be proportionate to the remaining components. If a merger results in a new component to the index, it will be included to the extent of the predecessor component as long as the entity is Canadian. I do not foresee a foreign entity acquiring any of the 9 DCOGI companies anytime soon, but if a successor entity is foreign, it will be sold at the opening of the first day of the completion of such merger.