Falling oil prices cut into expected gains in Alberta’s corporate profits

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Alberta is in the midst of a boom that is drawing tens of thousands of people to the province and spurring a sharp rise in consumer spending.

But with pipelines out of the province full, the value of its most important product – oil – is rapidly diminishing, largely wiping out expected gains in corporate profits.

Alberta has become a dual-track province, as a second-quarter financial update shows consumers enjoying wage increases and gains in disposable income while the corporate sector struggles against oil prices that have dipped far below forecasts. Retail sales growth in the province is up 8.9 per cent over 2012, while the government estimates corporate profits will rise 2.3 per cent, far below the 11.8 per cent it had expected in its budget just a few months ago.

Doug Horner, Alberta's finance minister, pinned the problems on the difficulty Alberta oil producers have had in getting their oil to lucrative international markets, where prices are far higher than in the U.S., which is effectively Canada's only energy export market today.

"This isn't a good situation to be in, and it's costing us," Mr. Horner said.

Resource revenues in the first six months of the fiscal year are down $1.4-billion compared to expectations. The province still expects a $2.3-billion to $3-billion annual deficit, the same number it gave out in its first-quarter update three months ago. But it continues to rely on oil price expectations that are more optimistic than markets. For example, average NYMEX futures through to the end of March show a West Texas Intermediate oil price of $86.91, and a Western Canadian Select heavy oil price of $59.41. Alberta is budgeting for $92.50 and $70, respectively.

Mr. Horner argued that Alberta has been more realistic than Saskatchewan, which has estimated $95 WTI, and that futures markets are prone to change.

"Those futures markets are moving negatively today, and I would hazard a guess that we would all agree because of fear of the fiscal cliff – and what's going on in Europe," he said. "That could change next week."

And in an odd twist, government corporate revenues are up despite the hit to its corporate sector earnings. Half-year corporate income tax is $520-million, or 35 per cent, ahead of expectations. Government officials say that is attributable to the closing of tax loopholes on revenue from income trusts and revenues, which can no longer be deferred as it was in the past.

The Alberta government used its fiscal update to pave the way for borrowing, since its "rainy-day" sustainability fund is expected to diminish to $3.7-billion at the end of this fiscal year. Borrowing will be done for capital projects rather than government operations, Mr. Horner said.

"What we are doing is making a long-term investment that will pay off for the future. It's like taking a mortgage out on your house," he said.

He also argued that Alberta has to build to prepare for an influx of people, as it expects a million new residents in the next 20 years.

Some of that is already happening. Drawn by earnings that sit 20 per cent above the Canadian average, some 42,000 people came to Alberta in the past six months – roughly half from Canada and half from international locations. So far this year, the province has created 58,600 jobs. Housing starts have leapt 34 per cent ahead of last year, while the provincial population is now expected to expand by 2.5 per cent, instead of 2.1 per cent.

The growth, however, comes at a time of increased corporate uncertainty. Difficulties in selling oil, and increasingly acute concerns about the cost of producing oil sands crude have prompted a gut-check by companies – and tempered market expectations.

This week, for example, CIBC Capital Markets analyst Andrew Potter lowered his production forecast for Suncor Energy Inc. by 5 per cent. Suncor has been arguably the most vocal oil sands company in cautioning that it expects to focus on costs rather than growth.