Chart 1: Survival of the fittest
Canada’s natural gas production is falling dramatically, domestic prices are so low that companies can’t cover their cash costs, and exploration is largely on hold.
Average daily output this year is likely to slide to the lowest level since 1993, says Peter Tertzakian, chief energy economist at ARC Financial Corp. If you’re keeping score, that’s 23 per cent lower than in the peak year of 2002.
After a choppy 2011, gas production began a steep decline at the beginning of the year, Mr. Tertzakian writes in a research report. Every month, about 190 million cubic feet per day less of the fuel is being produced.
If the trend continues, output will be down to 12.2 billion cubic feet per day by year end, he says.
Producers have for months now been in “blow down” mode, with a steep drop in well completions; the upshot is little replenishment from new wells.
But meanwhile innovative Canadian companies are exploiting low-cost resource plays with new horizontal drilling and hydraulic fracturing technologies. So-called “new age” plays are nudging conventional high-cost ones out of business, he writes.
Mr. Tertzakian calls this a “Darwinian cleansing,” and predicts that only the fittest producers with access to the best assets, technologies and markets will survive “the cash-flow famine.”
Chart 2: Quality matters
Even in the face of global market jitters, the Canadian dollar has been relatively resilient against the U.S. greenback.
One of the factors supporting the loonie was the extent to which Canada’s current account deficit in the first quarter was financed by foreign direct investment rather than by more volatile portfolio flows into areas such as securities, National Bank Financial’s Krishen Rangasamy points out.
That means “the quality of inflows improved significantly in [the first quarter]” he writes.
Net foreign investment rose to $14.6-billion in the first quarter, the highest since the second quarter of last year.
Grabbing the lion’s share – $8.2-billion – of those inflows were the energy and mining sectors.
It’s quite likely that falling commodity prices will put a dent in energy and minerals inflows in the second quarter, he writes. Portfolio inflows, however, may have increased as a result of a flight to safety amid Europe-related concerns.
Chart 3: The student debt explosion
If Quebec students noisily protesting hikes in tuition-fee hikes feel mistreated, they should look south of the border.
Aggregate student debt in the United States posted a spectacular jump in 2011 and now stands at $1-trillion (U.S.), or about 7 per cent of GDP, according to the U.S. Consumer Financial Protection Bureau.
The average outstanding student loan balance in the third quarter of last year was $23,000, according to the New York Fed.
Using these and other stats, Pierre Lapointe of Brockhouse Cooper argues that this student-debt explosion will result in a lower home-ownership rate south of the border.
U.S. college tuition costs have ballooned by a cumulative 57 per cent between 2001 and now, whereas average weekly earnings for 25 to 34 year olds fell by 7 per cent, he says.
“If wages are barely growing in real terms, it is no wonder that 27 per cent of all student loans are currently delinquent,” he writes.
A feeble employment outlook and sky-high student loans for an entire segment of the population will translate into less money flowing into home-ownership, he says in a recent report.