Canada’s energy industry has sustained so many body blows as pipelines have become stuck in limbo that Ottawa’s reapproval of the Trans Mountain expansion alone won’t return it to its former glory.
First off, the green light might not lead to it getting completed and taps opened. The next chapter will almost certainly be another court battle over environmental or constitutional aspects of the approval that opponents believe were unjust.
Even if, miraculously, there are no snags in bringing to fruition the $7.4-billion expanded link between Alberta’s oil and the West Coast’s access to markets, it could be years before global investors are convinced of solid prospects for returning to the sector.
Grab a tissue. Let’s take stock.
Even though pundits and investors alike had long expected Prime Minister Justin Trudeau and his cabinet to issue a new clearance, shares in Canadian oil and gas companies have languished. The S&P/TSX Capped Energy Index has fallen back to the levels of the start of the year after a brief pop in April following the election in Alberta of pro-oil United Conservative Premier Jason Kenney. There were pre-announcement gains on Tuesday, but well-known names such as Encana Corp., Crescent Point Energy Corp. and Baytex Energy Corp. have recently fallen to near historic lows.
Analyst after analyst has complained that international investors have little time to hear about value now hidden deep in the stocks. They are worried that regulatory uncertainty will continue ruling the day, keeping a tight lid on returns. A Trans Mountain expansion will help alleviate some of that, although a best-case scenario has the project in operation some time in 2022.
In the meantime, the capacity to ship Canadian oil to current markets could actually shrink before then. Unless there’s a settlement, Enbridge Inc.'s Line 5, which extends to Sarnia, Ont., from Superior, Wis., could be shut down within two years in a disagreement with Michigan’s governor over whether it should be allowed to operate while the company digs a tunnel under the Straits of Mackinac to house a replacement.
That dispute came to a head early this month just as Enbridge suffered a different setback, in its already-delayed plan to replace a major Canada-U.S. pipeline known as Line 3, when a Minnesota court ruled its environmental assessment was inadequate.
All of this, along with a recent slide in international crude prices, has barely kept the wheels of commerce turning. In the first quarter, equity financing in the industry slumped to a paltry $185-million from year-earlier $235-million, according to Sayer Energy Advisors. By contrast, share issues totalled $3.3-billion in the first quarter of 2014, a few months before the crude oil market began its downturn. Merger and acquisition activity in the period this year was almost nonexistent. One major deal – Husky Energy Inc.'s $4.3-billion hostile bid for MEG Energy Corp. – ended in shards when Husky decided to bail at the 11th hour.
The deal drought ended in May when Canadian Natural Resources Ltd. bought Devon Energy Corp.'s remaining Canadian business for $3.8-billion, adding to its oil sands heft but leaving another reminder that foreign companies have headed for the exits.
The slowdown has taken its toll elsewhere. On Monday, onetime small- and mid-cap banking powerhouse GMP Capital Inc. announced it was selling its capital markets business to U.S.-based Stifel Financial Corp. for $70-million. That is nearly 30 per cent less than what GMP paid for Calgary oil and gas dealer FirstEnergy Capital Corp. less than three years earlier.
Of course, it would be foolish to assume that energy companies will be out of favour forever, just as it would be silly to expect the shares to plateau indefinitely. But it may be wise to remember that the removal of one big uncertainty does not necessarily mean the rest will just fall away to usher back the industry’s good old days.
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