Energy minister ‘disappointed’ but preaching patience
Hopes that tax cut would prompt oilpatch to boost employment have yet to bear fruit
Alberta’s energy minister is “disappointed” petroleum producers haven’t boosted spending in the wake of the province lowering corporate taxes, but Sonya Savage is preaching patience — saying it will take time for the payoff to be felt.
The UCP government reduced the corporate income tax rate by one percentage point to 11 per cent effective July 1, part of a plan to lower it to eight per cent by 2022 to ignite job creation.
In second-quarter financial reports, several large oil and gas producers noted the impact on their bottom line. Only a few firms have increased spending plans that would create more employment.
“Some of them are using it to buy back shares and to reposition (and) balance their books. It’s the same as when you come across a windfall as a private citizen, you pay down the mortgage,” Savage said in an interview.
“We would like to see that money being invested into jobs. We’d like to see it being invested into projects; we’d like it to stay here in Alberta to create jobs.
“So yeah, we are a little disappointed in seeing what decisions have been made on where that investment, where that money, goes. But that’s decisions of corporate boards.”
The UCP pledged in the spring election to lower the corporate tax rate by one-third to eight per cent, saying it would create at least 55,000 jobs and expand the economy by $12.7 billion.
The opposition NDP billed it a historic “giveaway” to profitable firms.
During the second quarter, oilsands producer Suncor Energy reported net earnings climbed to $2.7 billion, including a one-time deferred income tax recovery of $1.1 billion to reflect the reduction of Alberta’s corporate income tax rate.
Imperial Oil estimated its net income at $1.2 billion for the quarter, including the impact of $662 million tied to lower corporate income taxes.
Despite improved profits, an array of issues has companies holding on to their chequebooks, including Canada’s ongoing pipeline constraints, difficulty in raising money and the growing global trade concerns.
“We are seeing some increased investment,” Savage added. “We will watch throughout the fall to see where these things go. So, I’m not concerned.”
With Alberta’s unemployment rate climbing to seven per cent last month as 14,300 jobs were lost, the NDP maintains the tax cut isn’t working.
“The concern is that there are companies that are not using the corporate tax savings — or the reduction in what they’re paying in taxes — to hire new people and invest in job creation, which is what Premier Kenney promised,” said NDP MLA Deron Bilous.
“Albertans need jobs today … not in two years from now.”
Analysts caution it’s far too early to see the impact of a tax reduction that will be spread over several years, particularly with the headwinds facing the province’s largest industry.
The country’s six principal oilsands players did have a strong quarter, reporting about $3.6 billion in free cash flow after dividends, which is up from $2.7 billion in the first three months of the year, according to a report by BMO Capital Markets.
The long-term question is what they do with their growing levels of cash moving forward.
Today, they’re sitting on their money, using it for share buybacks or dividends, benefiting shareholders, said Peter Tertzakian, executive director of ARC Energy Research Institute.
“These companies, their mandate in life is to create productive capacity, but we don’t need any more productive capacity because we are market constrained,” he said. “Why would you invest your surplus if you can’t sell the product?”
Industry capital spending is forecast to drop by $2 billion to $38 billion this year, according to data from the Canadian Association of Petroleum Producers.
And the market has punished companies that have increased spending.
Birchcliff Energy reported strong second-quarter results Thursday and bumped up its capital spending by $38 million to $242 million. In turn, its stock fell by nine per cent.
“Anybody who implies they’re going to add productions, in this environment, you are crucified for it,” said Rafi Tahmazian, a senior portfolio manager at Canoe Financial.
Given the nervous investment climate, oil and gas producers are reluctant to signal they will spend more.
The Canadian industry isn’t “out of the woods yet” and the immediate investment challenges are a lack of pipeline capacity and the province’s production curtailment plan, said CAPP vice-president Ben Brunnen.
“The corporate income tax (cut) is a helpful signal that does improve the balance sheet, but it’s certainly not enough to get the capital flowing with the other factors that still need to be sorted out,” he said.
These changes are also unfolding during an uncertain economic environment. Oil and gas prices have been swinging wildly in recent weeks, and global demand growth for crude is expected to fall. Advantage Oil & Gas CEO Andy Mah said companies need to see stability in pricing, as well as market access improvements, if capital programs are going to expand.
The tax cut has an immediate impact on retained earnings and should influence investment decisions over time, but it will take more than three months to fix the issues facing the sector, he said.
“What it does, in effect, is reduce that threshold whereby companies could invest money at lower commodity prices,” Mah said.
Any consideration of the tax cut should also consider whether it’s stopped companies from curbing spending, added University of Calgary economist Trevor Tombe.
And while energy companies are facing challenges, all industries in the province benefit from the lower taxes, he said.
“Reductions in corporate income tax rates do have a positive effect on investment,” he said.
“Incentives matter and businesses will invest more with lower corporate income taxes because the returns to investing are higher.”
Alberta’s new tax cut just kicked in last month.
But the debate over its merits — and what the payoff for the province will be — has only begun.