There’s a tragedy unfolding in the oil sector, yet somehow the feds don’t seem to get it
For starters, their silence on Encana’s exit adds to West’s woes, says Martin Pelletier.
The news of Encana’s name change and relocation to the
U.S. on Halloween may have spooked Albertans, but the bigger question is whether the developments are enough to finally scare the federal government into realizing just how precarious the situation unfolding in the oilpatch — a sector responsible for 11 per cent of our country’s GDP — really is.
What many forget is that capital is highly mobile and takes the path of least resistance.
This means that alongside return on investment, risk is one of the most critical factors taken into account when making capital allocation decisions. Unfortunately, when it comes to investing in our energy sector Canada is now viewed as a very high risk region with a low return.
In total, foreign capital divestitures have amounted to more than $30 billion in the past three years.
Kinder Morgan, Statoil, ConcocoPhillips, Royal Dutch Shell Plc, Marathon Oil Corp., Devon Energy, Equinor ASA, Koch Oil Sands and Total SA have all either reduced their exposure or have left altogether.
Investors have also hit the sell button with carnage for those who chose to stay put and ride it out as many exploration and production and Serviceco share prices are now trading at half to one-quarter of their 2014 highs.
That said, while investors have the ability to move their positions abroad quite easily, it’s a different story for the remaining Canadian energy companies, especially for those with domestic operations.
Instead many are now forced to harvest their internal cash flow to either pay down debt, return it to shareholders via dividends or undertake share buybacks, which only compounds the contraction of the industry by returning capital instead of putting it in the ground.
Maybe this is the outcome certain environmental lobby groups desire but it does come at a huge cost.
All of this capital could have been used to fuel economic growth at a time when, according to Bank of Canada governor Stephen Poloz, “the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist.”
Capital is also vital if we want to transform ourselves into a low-carbon economy such as investing in net-zero production technology thereby providing an alternative to other more environmentally unfriendly resource extraction regions.
Instead of assigning blame for how we got here — and in our opinion industry deserves some of the blame due to its complacency in the face of the disruption caused by U.S. shale — we need to look forward as to how we can attract capital in an environment characterized by slowing global economic growth and weaker oil and gas prices.
Changing the narrative is a great place to start and that means derisking the sector through sound government policy rather than introducing anti-infrastructure and anti-oil export legislation such as
Bills C-69 and C-48.
While many may argue the federal government’s support is evident via the nationalization of the Trans Mountain pipeline, we think it completely misses the bigger picture.
Taxpayer capital would have generated a significantly higher return on investment if it was put to work fostering an environment where companies like Kinder Morgan can facilitate pipeline development on their own.
Finally, it costs nothing to at least offer verbal support to a struggling industry and yet barely a word came out of the Prime Minister’s Office regarding the Encana announcement.
Such silence only adds to perception that Canada is not open for business if it has anything to do with energy.
It’s hard to imagine the feds would have taken the same approach if SNC-Lavalin had decided to move to Boston, Saputo decided to make cheese in New Jersey, or Bombardier to build its planes in Michigan.
While we try our best to distance ourselves from politics, we don’t think it’s a coincidence that Encana decided to pull the plug immediately following the election, and unfortunately, we expect to see more of this happen in the months to come.
One has to wonder if it is truly darkest before it goes pitch black, as it certainly feels that way as both an energy investor and an Albertan these days. Financial Post
Martin Pelletier, CFA, is a portfolio manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.