Editor’s Note: Please see our latest analysis of Suncor Energy Inc., Husky Energy Inc., Potash Corp., TransCanada Corp., and Westjet Airlines Ltd. in the Portfolio Update following the article below.

Markets have an interesting way of defying politicians. Although the Obama administration has deferred a decision on the Keystone XL pipeline until the president’s final year in office, that hasn’t stopped Canadian crude from finding a way to get to market.

You have to admire the speed and ingenuity with which the private sector manages to work around the whims of politicians and the apparatchiks who serve them. No rule-making bureaucrat could ever hope to keep up.

With production from prolific U.S. shale plays crowding out Canadian crude from key pipelines and no Keystone XL to alleviate the bottleneck, oil producers began shipping crude by rail, barge and even truck.

Unfortunately, not only are these methods slower and costlier than pipeline transportation, they can also be much more dangerous. The Lac-Megantic tragedy in 2013 underscores why it’s preferable to ship energy products via pipeline: An oil train carrying Bakken crude derailed in the small Quebec town, resulting in a fire and explosion that killed 47 people.

Nevertheless, the rolling pipeline keeps on rolling. Now that crude oil production in the U.S. shale plays is finally on the decline, foreign oil is suddenly in demand again.

And if we’re not going to be completely energy self-sufficient, then we may as well get our oil from a friendly nation, such as our mild-mannered neighbor to the north. Canada is the world’s fifth-largest producer of oil, and the vast majority of its crude gets shipped to the U.S.

In fact, after plunging during the first half of the year, exports of Canadian crude to the U.S. hit a new all-time high in August, at 3.4 million barrels per day, according to data from the U.S. Department of Energy.

Even before crude oil prices collapsed, Canada’s share of U.S. oil imports began to rise, as demand for costlier oil from overseas declined in the wake of the Shale Revolution.

Canada’s lower exchange rate has also given a big boost to U.S. demand for its energy products, both in terms of volume and market share.

The currencies began to diverge in mid-2013, as it became apparent that each country’s central bank was headed in an opposite direction on interest rates.

Since then, the Canadian dollar has dropped nearly 21%, all the way down to USD0.76. That’s a far cry from the heady days less than three years ago when the loonie traded above parity with the greenback.

But it’s helped Canadian crude grow from 30% of total U.S. oil imports in mid-2013 to 45% as of the end of August, despite the fact that total oil imports are only 1.3% lower than they were at the beginning of this period.

Equally impressive, the volume of U.S. imports of Canadian crude has jumped nearly 46% over that same period, outpacing Canada’s production growth of 22%.

As such, two things are clear. Though Canada desperately needs to develop new export markets for its energy products, it’s still managed to steal U.S. market share away from foreign competitors. And while it takes time for a lower exchange rate to pump up an economy, the turmoil in Canada’s energy sector would obviously be even worse without it.

The Dividend Champions: Portfolio Update

By Deon Vernooy

Suncor Energy (TSX: SU, NYSE: SU) announced a net loss for the quarter, but this included a large unrealized foreign-exchange loss on U.S. dollar denominated debt, which companies are required to record in their financial statements.

More reflective of the actual business performance, Suncor reported cash flow from operations of CAD1.30 per share, down 17% year over year. The dividend per share was previously announced, and the new payout is 4% higher than a year ago.

The refining and marketing division reported a stellar quarter, with a 37% improvement in EBITDA (earnings before interest, taxation, depreciation and amortization) mainly as a result of an improved utilization rate in the refining operation.

The oil production division recorded a strong operating result, with key performance indicators tracking in the right direction: Daily oil equivalent production was 9% ahead of last year and oil sands cash operating costs fell 13%, to CAD27 per barrel. However, realized oil prices were well below last year, leading to a sharp decline in profits.

Nevertheless, the balance sheet is solid, with a debt-to-capital ratio of 19%. Operating cash flow remains sufficient to cover the dividend, but the relatively large ongoing capital expenditure program will continue to constrain free cash flow.

Despite the crash in crude oil prices, Suncor continues to perform well thanks to integrated operations that include oil production, refining, and marketing through a large-scale retail fuel operation.

Suncor recently made a bid to acquire Canadian Oil Sands Ltd. (TSX: COS, OTC: COSWF) for CAD6.6 billion. The stock-for-stock deal entails an exchange of 0.25 Suncor shares for every Canadian Oil Sands share and will remain open through December 4. We believe that Canadian Oil Sands shareholders will find the Suncor offer of interest, but the offer may have to be sweetened to close the transaction.

Suncor remains one of the few commodity producers that qualify for inclusion in our Dividend Champions Portfolio. The relatively safe dividend currently yields 3.1%.

Although growth will be limited until the price of oil recovers, the company is in an excellent position to pick up top assets on the cheap from troubled competitors. Our fair value estimate is USD26/CAD34.

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Even the word “terrible” isn’t enough to describe the third-quarter results of Husky Energy Inc. (TSX: HSE, OTC: HUSKF).

The company reported a CAD4.1 billion loss for the quarter due to impairments, write-downs, and sharply lower oil prices, among other factors.

Excluding the impairments and write-downs of oil and gas assets, the loss was CAD101 million, compared to a profit of CAD572 million a year ago. Cash flow from operations per share, which is a better indicator of business performance, declined 50% year over year.

To add insult to injury, the company also decided to pay the quarterly dividend to shareholders in the form of Husky shares in lieu of cash.

The complete suspension of the dividend would have been understandable in this challenging environment. Instead, the company has opted to maintain the dividend in a manner that will be dilutive, thus harming the long-term interest of shareholders.

In addition, we believe a cash dividend (or in this case, the lack thereof) conveys a strong message. The board of directors considers numerous factors, including earnings, commodity price outlook, future capital requirements and the financial condition of the company when setting the dividend. As such, it is a powerful verdict on the state of the business.

Husky was selected as a member of the Dividend Champions Portfolio based on its ability to sustain its dividend even during difficult times.

In this regard, we analyzed numerous factors, including the dividend track record, the strength of the balance sheet, cyclicality of profits, cash flow, future capital requirements, dividend coverage, and long-term growth prospects.

These considerations resulted in an overall Quality Score of 3.0, which is the lowest of all the companies in our Dividend Champions Portfolio. We penalized it for a dividend cut in 2009, as well as low historical and prospective dividend growth.

However, based on its balance sheet strength and cash flow generation, we had believed that the cash dividend would be maintained until such time that major projects such as Sunrise (oil sands) and Liwan (gas) started to make full contributions.

Unfortunately, we were mistaken. The company is clearly in for a long, hard slog and decided to preserve cash for other purposes.

Husky may well be a strong performer when energy prices recover. But the Dividend Champions Portfolio is expressly focused on cash dividends. Consequently, we are looking to sell our position, though we will await a more opportune time to do so. Husky is now a Hold.

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Potash Corporation (TSX: POT, NYSE: POT) announced quarterly earnings per share of USD0.34, down 8.1% year over year. This included a $0.03 non-cash write-off related to its phosphate operations.

The company had previously declared a dividend of USD0.38 for the third quarter, up 9% from a year ago.

Lower potash and nitrogen prices were the main cause of the decline in profits, though demand for potash outside of North America remained strong. Nitrogen is plagued by an oversupply and weaker demand in Latin America.

Potash Corp. flagged the removal of about 500,000 tonnes of potash production (about 5% of total production) from the market by permanently closing the Penobsquis mine in New Brunswick and reducing production at other selected mines. This follows similar actions recently taken by other major potash producers, Mosaic and Uralkali, with the objective of protecting the potash pricing environment.

Potash Corp. also lowered its earnings estimate for the full year by 14%, based on expected lower potash sales volumes and weaker nitrogen pricing.

Shares of Potash Corp. currently yield 7.5%, a level at which concerns would normally be raised about the sustainability of the dividend.

While there are no guarantees that the company will be able to maintain the dividend should the operating environment deteriorate significantly, we take comfort from a number of indicators: capital expenditures will be reduced considerably over the next few years as the expansion program concludes; the balance sheet remains solid; and operating cash flow is adequate to cover the dividend even at sharply lower fertilizer prices.

Nevertheless, the operating environment seems to be weaker than we anticipated. And it may remain in the doldrums for the foreseeable future, especially as new potash production capacity from less price-conscious producers comes on line over the next few years. However, prospects for growth in demand remain sound, as global food and protein consumption increase.

In our view, Potash Corp. is considerably undervalued and will reward patient, long-term investors. Potash Corp. has a fair value of USD27/CAD35.

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TransCanada Corp. (TSX: TRP, NYSE: TRP), more often in the news for its controversial Keystone XL pipeline than for other parts of its vast energy infrastructure business, reported third-quarter earnings per share of CAD0.57, down 11% from a year ago. Adjusted for one-time items, earnings were only marginally lower than last year.

Both natural gas and liquids pipelines produced strong results, but the more volatile energy generation business reported a 30% drop in quarterly profits, dragging down the overall financial result.

TransCanada has a roster of capital projects underway that will require an additional USD7.3 billion of spending over the next three years. Further out, for completion in 2019 and 2020, another USD36 billion worth of projects, including Keystone XL, are targeted for completion.

These are ambitious plans and with operating cash flows currently only covering capital expenditures, it implies that the $1.5 billion annual dividend is effectively financed with debt. Unsurprisingly, net debt has increased by 20% since the start of 2015, and the debt-to-capital ratio now stands at 57%.

The company says it plans to grow the dividend by 8% to 10% annually through 2017, while maintaining its investment-grade credit rating. Although there are many levers for the company to pull if the balance sheet becomes strained, it will be a challenge to achieve all the objectives.

TransCanada’s valuation remains at a discount to its peers on all key measures. And its shares currently yield 4.7%. For now, we plan to keep holding it in the Dividend Champions Portfolio. TransCanada has a fair value of USD35/CAD46.

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Westjet Airlines Ltd. (TSX: WJA, OTC: WJAVF) announced third-quarter results that made for thoroughly pleasant reading. Adjusted earnings per share increased by 24% year over year, and the dividend per share was increased by 17%.

Operating metrics mostly moved in the right direction, with passenger traffic up 4.5% and operating margins increasing nicely, to 15.3%.

However, capacity also increased by 6.2%, which resulted in a slightly lower load factor of 81.8%.

Lower fuel costs boosted results, with the operating cost per average seat mile down 5.7%.

The balance sheet remains in excellent shape, with a debt-to-capital ratio of 37%.

Operating cash flow increased 66% during the first nine months and proved to be enough to finance all capital expenditures, dividend payments, and a considerable share-repurchase program, which reduced the share count by 3.5% over the past year.

The stock is cheap in absolute terms and also relative to its peers. The dividend yield is somewhat on the low side, at 2.4%, but growing rapidly and well covered by net profits and free cash flow.

We are comfortable holding the stock in the Dividend Champions Portfolio and estimate the fair value at USD21/CAD28.