U.S. tax talk clouds reports from industry
Snapshot of energy sector’s financial health to be released this week
Energy companies are set to release their latest earnings reports, offering a snapshot of the industry’s financial health amid investor fears a proposed U.S. border tax would punish Alberta’s oil and gas industry.
Ryan Lance, chairman and chief executive of energy giant ConocoPhillips, said in a recent call with analysts there is “a lot of uncertainty on the border adjustment tax and its potential impact on how crude and other products move across the border.
“There’s a little bit to be seen yet, what that means,” said Lance, whose company hit record production levels at its Alberta oilsands operations in the last three months of 2016, averaging 213,000 barrels of oil per day.
“Does it get exempted, or how are the details of that going to unfold? We’re watching it closely.”
This week, Alberta oil and gas companies begin reporting fourthquarter earnings from 2016, while the key players that deliver crude into the U.S. — TransCanada Corp. and Enbridge Inc. — hold conference calls with analysts later in the month.
The border tax, proposed by Republicans in the House of Representatives, would effectively raise the costs of imports into the U.S.
The protectionist measure, part of a suite of proposed tax reforms that would also slash the corporate tax rate, is designed to bolster U.S. manufacturing by discouraging imports from other countries.
“Given that Canada sends about three million barrels of oil per day to the U.S., its industry could get slammed,” Michael Gregory and Sal Guatieri, economists at BMO Capital Markets, said in a recent report.
“The Canadian price of oil would fall, while the U.S. price would rise ... The uncertainty about the tax’s impact would delay investment plans of Canadian energy producers.
“Still,” the authors cautioned, “the U.S. remains highly dependent on Canadian crude, and American consumers would likely balk at paying higher gasoline prices.”
U.S. House Speaker Paul Ryan said Republican lawmakers are unlikely to start tackling changes to tax policy until the spring, which means it will be months before investors get any clarity.
Analysts at RBC Capital Markets pointed to a “pea soup fog” of uncertainty surrounding Canadian energy infrastructure stocks ahead of upcoming earnings reports.
The analysts predicted several industry-wide concerns will loom large in company conference calls about their fourth-quarter performances.
There will be questions about the impact of improved energy prices on production, the effect of higher long-term interest rates and the potential fallout of proposed changes to U.S. tax policy, the analysts said in a report.
“In general, it appears that the market is shying away from the uncertainty,” they said, “and we look to the various conference calls to see if the companies provide colour that helps define the upside and downside scenarios to enable investors to move forward with greater confidence.”
Dirk Lever, energy analyst at AltaCorp Capital, said taxing imports of Canadian heavy oil could hurt U.S. refineries that are designed to process that very type of crude. He said these imports are a boon for U.S. refining jobs.
“If all of a sudden there’s a tax coming across the border, the U.S. people will end up paying more at the pumps,” Lever said.
According to the BMO Capital Markets report, the odds are low that the border tax will be implemented in its current form. Among other challenges, it will attract “lots of aggressive lobbying” by groups most disadvantaged by the proposal.
More than 100 retailers, including Walmart and Target, along with several trade associations formed a new coalition, called Americans for Affordable Products, to fight against the border tax which they expect will hurt their businesses.
The uncertainty about the tax’s impact would delay investment plans of Canadian energy producers.