Investors abandon trapped Canada oil
Canada’s energy companies can’t get any love, even from many Canadians.
With pipeline, regulatory and political frustrations reaching new heights, the nation’s energy stocks slumped to their lowest level in almost two years this month. The iShares S&P/ TSX Capped Energy Index ETF, which tracks Canadian energy companies, has seen about $56 million in outflows this year versus $32 million in inflows for an ETF focused on U.S. stocks. The pain has extended to the fixed-income market, with U.S. dollar high-yield bonds from Canadian energy issuers returning less than their global peers in the past 12 months.
At the heart of the sector’s woes is a dearth of pipeline capacity, which has depressed Canadian oil and natural gas prices. A new regulatory regime designed to speed up pipeline approvals is instead seen delaying projects while Alberta and British Columbia are fighting over one of the conduits the federal government has approved. On top of that, the industry is facing carbon taxes other jurisdictions don’t have to pay and is competing with American drillers, which are seeing taxes cut under the Trump administration.
‘I’m not crazy about Canada’
“I’m not crazy about Canada,” Paul Tepsich, founder and portfolio manager at hedge fund High Rock Capital Management in Toronto, said by phone. “We’ve got taxes going up and regulations going up.”
Tepsich said he reduced the average exposure to Canadian energy equities in his clients’ to well under 3 percent from 8 percent a year ago. And while credit exposure remains relatively steady, he has no plans to add new holdings. He’s been adding to short-dated U.S. Treasuries amid market volatility and will look to selectively add U.S. energy names.
The big albatross for Canadian energy companies has been weak prices caused by the pipeline pinch. Western Canadian Select, the main grade of oil extracted by Canadian oil-sands producers, is trading near the widest discount to West Texas Intermediate crude in almost four years. Alberta Energy natural gas prices are also lagging their U.S. equivalent. Western Canadian Select discounts would cost the Canadian economy about $12.3 billion a year, or 0.75 percent of GDP, if maintained at current levels, Scotiabank Chief Economist Jean-Francois Perrault said in note.
The pipeline frustrations recently erupted into a trade war between oil-producing Alberta and neighboring British Columbia after the coastal province proposed limiting new shipments of oil-sands crude through its borders, possibly stalling a major expansion of the Kinder Morgan oil pipeline. Alberta Premier Rachel Notley banned imports of B.C. wine and abandoned talks to possibly buy more electricity from its neighbor.