National Post: Don’t kid yourself, we're facing a made-in-Canada energy crisis
I like to go for walks at lunch as I find that the fresh air helps me separate the actual issues of the day from all the noise in the market. This past Thursday, however, there was no escaping the noise.
It came in the form of a 2,000-plus person, pro-pipeline rally held near the Hyatt Regency Hotel during Prime Minister Trudeau’s visit to downtown Calgary.
Interestingly enough, others have been on this walk before me.
Although I’m too young to remember the 1980s National Energy Program, what is currently happening appears to be another made-in-Canada energy crisis, coincidentally once again under a Trudeau government.
The carnage is everywhere, beginning in the industry itself — where jobs and opportunities are disappearing — and rapidly working its way into capital markets, where energy is in freefall and billions are being lost.
For some perspective, we calculate that Canada’s two largest oil companies have seen their market capitalizations shrink by more than $38 billion from their July highs.
While the crisis is now being felt most severely in Alberta, we do worry about the impact it will have nationally — and don’t kid yourself, it will affect the entire country — despite the head-in-the-sand approach that has been taken by both the Federal Government and the Bank of Canada.
The root of the problem is that pipeline capacity didn’t keep pace with oil sands development during the good old days of $100 oil, something for which both industry and past and present governments share the blame.
Consequently, a situation that was building up for years has hit the industry all at once, with stranded oil and a blowing out of Western Canadian oil prices when compared to global benchmarks such as West Texas Intermediate (WTI) crude.
Already it’s been reported that the Canadian economy is losing $80 million a day because of that price gap.
The light at the end of the barrel was supposed to be an improvement in local pricing upon the completion of refinery turnarounds in the U.S., but instead the bottom fell out of global oil prices, with WTI posting its worst one-month drop since 2015. This wasn’t the way the differential was supposed to narrow.
From an investor viewpoint, this is an especially terrible development as Canadians still own a lot of oil and gas in their portfolios.
For example, despite the meltdown, energy remains the second-largest weighting in the S&P TSX 60 at over 19.6 per cent. Two energy stocks, Suncor and Canadian Natural Resources, currently represent 6.9 per cent of the index despite Suncor shares having sold off 21.8 per cent and Canadian Natural 31.4 per cent from their respective July highs. Even worse, there are a plethora of junior and intermediate oil and gas producers that have seen more than half of their values wiped out over the past few months and are testing new all-time lows.
Instead of being caught like a deer in the headlights, investors need to take immediate action when it comes to their energy portfolios. These measures include designing and implementing repair strategies that involve tax-loss selling and high-grading their energy exposure by shifting into better quality, safer names. Suddenly, balance sheets and the calibre of management matter more than ever.
For those lucky enough to have had an underweight position but are thinking of increasing their exposure to the sector, extreme caution is warranted — the same aforementioned rules on what to own apply to new positions, too.
Finally, this is a time when industry, the provincial and federal government need to take drastic action and implement repair strategies of their own. Industry needs to take the lead and finally start working together — and if they are unwilling to take excess barrels temporarily off the market themselves, then the provincial government needs to step in and do it for them.
The federal government also has to step up and acknowledge the seriousness of the problem. Perhaps a good place to start is by putting Bill C69, which would impose a new impact assessment process for energy projects, on hold.
The bottom line is that doing nothing is a terrible strategy and will not only lead to more frustration but also large losses both for the economy and in the portfolios of Canadian investors. And that’s a walk I think most Canadians do not want to go on.
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.