Crude Observations

Enough with the Negativity

Well, that was interesting. Clearly, judging by the overwhelming feedback, I hit a home run with last week’s blog. The straight up re-characterization of the pipeline file as a re-imagining of one of my favourite plays (Waiting For Godot by Samuel Beckett) was, I thought, fairly spot on given the senseless navel gazing and mindless discussion that informs the pipeline debate. Senseless waiting is a legitimate theme. OK, I lied. Last week was a dud. But it made an important point we are all feeling.


It also served as an potent outlet for my own pent-up existential angst as I grapple with general concerns about the economy, the industry and other more esoteric questions that impact my life on a day to day basis such as the environment, what world my kids are going to live in and who invented liquid soap and why.


Given this propensity to ponder, I must admit that I am just as guilty as the main characters of waiting around for something to happen. We’ve all become somewhat complacent at times. Accepting our fate and waiting for someone else to do something, anything, to move our lives forward.


Ah, the sweet bliss.


At least that was the case until a couple of things happened that shook me out of my lethargy and made me at least a little more determined to jolt myself out of my somnambulant rut.


These two occurrences are mutually exclusive yet intrinsically related.


First – on Monday May 13, Onex Corp announced that it had reached an agreement to acquire all the issued and outstanding shares of WestJet for some $5 billion. Under the terms of the acquisition, WestJet would cease to be publicly traded and become a private company. The offer was made at a 67% premium to the prior close. Wow.


All things considered, this is a tremendous deal for the WestJet shareholders and, accompanied as it was by guarantees regarding the head office staying in Calgary, it is also a great deal for WestJet management and employees, pretty much all of whom were shareholders and should receive a nice windfall.


I know there has been a fair amount of media teeth gnashing about the “loss of independence” for WestJet under new ownership but, come on, the new buyer is a financial investor, the expectations they have for management and the governance they will implement isn’t going to be that different than WestJet had as a publicly traded company with millions of shareholders.


I would even go so far as to argue that since the expectations are coming from one entity and won’t be driven by the random gyrations of a short-term profit obsessed market this should likely release WestJet management from the quarterly angst of financial reporting, near constant capital raising and profit-justifying, all the while in fear some short seller is about to take aim at your stock, just because. And this release should lead to a better and more intense focus on growing the business as opposed to protecting the stock price. This is the “go-private” thesis that I expect to see many more companies pursue.


The buyer, ONEX, is an internationally known, well-capitalized and highly-respected Canadian private equity firm whose mandate is to acquire and grow successful businesses in jurisdictions around the world. And they picked Western Canadian based WestJet. They aren’t creating “EastJet” – this investment is clearly a vote of confidence in a Western Canadian grown success story.


But. (Hey, there’s always a but).


But… these kinds of deals in Western Canada used to be the almost exclusive domain of our industry leading oil and gas companies and the service companies that keep them going.


Sure “diversification”, but it is a bit telling when the biggest Canadian private equity transaction in Alberta in the past 5 years is the purchase of an airline not an oil and gas company.


And then I got to thinking, which as we know by now is a bad idea for me…


Why is it that it is still so hard to get outside money to come into Alberta? We spend a lot of our time marketing deals to out of province and international buyers and there is always interest but closure seems to be a big issue.


And often the discussions break down because the narrative international buyers are presented with are relentlessly negative, as opposed to the WestJet narrative which is, as we all know, relentlessly positive and outward facing.


How could you not want to buy a company that is so upbeat as opposed to a massively undervalued oil and gas company kicking out obscene amounts of free cash flow (yes, I’m looking at you Canadian oil patch)?


Canadian deals with international buyers, in our world, get pushed to the side for many reasons. We’ve had a number of deals that have been put on hold as buyers elect to pursue US-based opportunities because that’s where the short term return is and it’s easier. And remember a few months back where I described a US private equity buyer who stepped back on a deal because their US-based board decided that Mexico (Mexico!) was less risky than Canada? This is the tip of the iceberg.


How do they arrive at these conclusions? Easy. We let them.


It’s all the negativity. We are stuck in a negative feedback loop that is killing our chances of reviving investor interest at just the time when the best opportunities may be presenting themselves. And industry factors aside, we may be our own worst enemy.


Don’t believe me? Consider the following.


We have a client. What they do doesn’t matter. What matters is that they do it so well that they have attracted the attention of an inbound, overseas, private equity-owned strategic buyer. Sounds great right? We have had numerous calls, exchanges of information and discussions around strategic fit. The discussions were so fruitful that the interested party came to Alberta to meet the client during which time it was obvious that these companies were destined to form a partnership of some kind.


Imagine my surprise to receive an email from the potential buyer expressing concerns about entering the Canadian market due to a challenging industry environment, the political headwinds facing the energy sector and, more specifically, the impact of political and regulatory risk as represented by bills C48 and C69.


I know I write about these a lot and we get this feedback all the time. These are for sure specific risks to doing deals in Canada. And we are prepared to answer these questions in a forthright and honest fashion. Presenting mitigating factors and defending and selling the Canadian oil patch is what we do.


Except this time, it was different. Typically, international buyers are getting information on Canada from a network of advisors whose data is only as good as the last issue of The Economist, so it’s easy to bring them around. But here, we found out that this particular buyer had done some serious homework and analysis – namely by consulting with other companies and advisory firms right here in Calgary. And based on that feedback, they had determined we were too much of a basket case to proceed.


As I said above, I’m used to disabusing potential investors of preconceived notions about Alberta as a place to invest. But it’s a rare occasion where I find myself confronted by my local peers actively chasing foreign direct investment away.


How in the world does this happen?


I would suggest we may have no one to blame but ourselves. Our relentless negativity is starting to bounce back on us.


Ask yourself – have we gone too far? Have we done such an effective job at portraying the Federal government and its policies and bills, like C48 and C69 as such potent existential threats to the industry that we may have become our own worst enemy?


Have we become so used to and skilled at delivering the negatives and ignoring the positives for partisan purposes that we are increasingly finding ourselves repeating it at all the wrong times in front of all the wrong people?


Think about it. We’ve been stuck in this witch’s brew of a slow to recover economy, industry uncertainty and partisan politics for so long that we have started to lose the ability to deliver a positive message.


And what may be a winning strategy to garner votes from disgruntled workers or force the Federal Government to finally pay attention to an industry under siege may in fact be a massive red flag for investors in other jurisdictions looking to deploy capital.


Consider our conflicted messaging. This is what inbound investors see and hear:


  • Bill C69 means no new infrastructure projects will be built in Canada. Ever.


  • Bill C48 is an attack by the Federal government on one province and one product


  • Trudeau hates the energy sector! He and his father have systematically tried to dismantle the industry and claim its riches for Eastern Canada! Separatist sentiment is rising!


  • Quebec needs to stop feeding at the trough of equalization!


  • If we don’t get TransMountain built, the industry is finished!


  • We must end the use of fossil fuels by 2030 and have our own Green New Deal!


  • Phase out the oilsands!


What they don’t hear is the Canada story because no one is telling it.


Instead they think, gadzooks! I can’t invest in that place! Never mind that we’re the fifth largest producer of oil and the 10th largest producer of gas located next to the largest consumer of both on the planet. We’re downright scary. Discombobulated. Chaotic. Run as fast as you can in the other direction. Right?


Look. Canada’s attractiveness as an investment destination has always been its regulatory stability, its political stability, being a safe haven for capital and having a proven ability to generate a decent rate of return for risk taken.


If we are going to deliver a lower rate of return on capital invested than, say, Nigeria, we need to make sure to justify that lower return. How? By being less risky and more stable. But in the current environment – evidenced by the statements above, that capital is deciding that investing in a countries like Nigeria or Mexico is less risky than a Canada that seems unhinged and erratic compared to the last 30 years.  And we’re doing it to ourselves because we are so polarized. It’s fine to argue internally, but when you show your dirty laundry to the world, the world moves past.


Capital travels, investment decisions are binary and they happen fast. Yes or no. People make decisions and their livelihoods depend on it. Investment managers have to become informed on what they are buying and have to sell the thesis to boards and committees that are inevitably less informed. If they have to think about it too hard, they won’t do it. There are paths of less resistance. A deal that makes eminent financial sense has absolutely zero chance against a headline that says a government is hostile to an industry or represents an existential threat.


Why in the world would you work to actively discourage investment?


It doesn’t matter if the Canadian oil patch is slowly turning itself around and the second half of this year is shaping up to be very positive. If we are screaming that the sky is falling, that is what the investment community hears.


Depressed yet? Don’t be. It’s not too late to turn this around. I would suggest that in some ways it is already happening. It just needs some push and polish.


Alberta’s UCP and Jason Kenney say that Alberta is open for business and this is good. The election has injected a little optimism into the market, but it needs help to continue.


They promise to defend the interests of the energy industry which is also good. A vigorous defence of the energy industry is a must.


But we need to tone down the rhetoric now that the political battles locally have ended.


It’s time for a little sugar. Time to step back from the brink and instead of telling people (directly and indirectly) not to come here with their damn money, remind them again why they should be in Canada and, while we’re at it, address some of the more common objections. We need to shape the narrative in less apocalyptic terms than we are used to. Because when you look at it, maybe it’s actually not as bad as we think.


Herewith my new talking points.


The regulatory environment is hostile to energy investment and Bills C69 and C48 are existential threats to infrastructure and mean no new energy investment will happen ever again.


Meh. Bill C48 is already behind the Senate woodshed. The Transport subcommittee has recommended it get killed and, even if the full Senate disagrees, the damage is done. It is politically inconceivable that the Trudeau government would pass this legislation in its current form in the current environment. It’s a dead parrot. And even if it did pass, then it would immediately be subjected to a constitutional challenge by various provincial governments and industry players as the discriminatory piece of virtue-signalling and pandering that it is. Not even going to mention the lack of indigenous consultation which we know kills everything. Finally, in the extremely unlikely event that the bill survives these challenges, what impact is it actually going to have? Are there any projects to the BC coast that would be subject to the tanker ban? Is there a risk of the tanker ban being extended to other coastal areas? Is there an argument to be made that Vancouver should have a similar ban? No. No and no. C48 is a politically motivated DOA, irrelevant bill.


Similarly with Bill C69, also called the no-pipeline bill, there is zero chance this bill gets passed in its current form. Another Senate committee has punted this back to the full Senate with 187 recommended changes. Even the government has industry favouring amendments that it wants to make. These amendments are all extensive and practical. So now the full Senate is going to vote on what happens next, most likely is it gets punted back to parliament for review with all the amendments. Then it is up to the Liberals. The current session ends at the end of June prior to the October election. I find it extremely unlikely that given the tight timeframe, the contentious nature of the legislation and the extensive proposed amendments that parliament and the Cabinet will be in a position to pass this into law just before summer break leading into an election without paying the price at the ballot box. Liberals don’t do that. C69 is the next government’s problem.


Justin Trudeau hates the energy industry and must go or it’s all over.


While this may be desirable to many, careful what you wish for and how you present this to the market at large. Sure the Liberal Party of Canada leans to the left. They have to, it’s the only way they can keep votes from bleeding off to the NDP. But they also like social programs and those get funded by the general economy and the energy sector. The Liberals will do what they need to do to stay in power and once there will do what is needed to keep the ATM open. You can see this already with the TransMountain purchase, the softening stance regarding the Bills mentioned above and a toned down approach to the new Alberta government.


Here’s the message to deliver to an international market. The Liberals will always campaign on the left and eventually govern from the centre. The Conservatives typically campaign in the centre and govern a bit right of centre. Neither outcome is truly “bad” for Canada as a whole. We’ve been doing it this way for more than 150 years and it has worked pretty well if we might say so. The Liberals aren’t some Socialist/Green cabal looking to throttle the economy and Andrew Scheer and the Conservatives aren’t some Trump/Ford abomination. They actually have more in common than differences. Sorry. It’s true.


While it may be argued that a Conservative government would be better for the energy sector, the difference isn’t as dramatic some would have you believe because these are national parties with constituencies and obligations across the country. If you believe that C69 will be fixed, it passes under a new Liberal government or some adapted version gets passed under a Conservative government. C48 is done regardless.


Let the election happen. The outcome is maybe not as important as many think. Canada plays in the centre.


Canada can’t get major infrastructure built


Well of course it does seem this way. But we are doing what we can and product always finds its way to market. That said, let’s take the measure of what is in the hopper.


Line 3 – expected to be operational second half 2020. Delay is in the US. The Canadian portion is pretty much done.


TransMountain Expansion – Federal Cabinet vote expected June 18, 2019. If it doesn’t pass, expect a revolution. No one wants that prior to an election. It will likely pass.


Keystone XL – currently hung up in the US, approved in Canada. Sure we’ve lost a construction season in the US, but the Canadian portion is in progress. The State Department is completing its restudy. There is every likelihood it will be approved.


Crude by Rail – This is always there. While the Kenney government is going to move on from the NDP plan, there will likely be some form of government participation/encouragement. This is a big egress bridging story to 2020 when Line 3 comes online.


So, despite the apocalyptic Bill C69 and the awful dreadful tanker banning Bill C48, there are three major pipeline projects that are likely to proceed because they precede any of these bills or aren’t impacted by them. Any combination of two of these addresses Canadian growth in production for the next decade.


That is what we need to tell investors.


No one is investing here


Not if I can help it.


Here’s what I am telling people. You can get in now, when we are about to inflect upwards, or you can wait 6 months and overpay. It’s up to you.


Enjoy your long weekend.



Prices as at May 17 (May 10), 2019 

  • The price of oil was up early this week then fell on renewed trade war fears
    • Storage posted an decrease
    • Production was down
    • The rig count in the US was down, slightly
  • Injections to storage were above expectations for gas. The market was unmoved
  • WTI Crude: $62.66 ($61.69)
  • Western Canada Select: $49.71 ($49.03)
  • AECO Spot *: $2.16 ($2.29)
  • NYMEX Gas: $2.612 ($2.600)
  • US/Canadian Dollar: $0.7434 ($0.7427)


  • As at May 10, 2019, US crude oil supplies were at 472.0 million barrels, an increase of 5.6 million barrels from the previous week and 39.7 million barrels above last year.
    • The number of days oil supply in storage is 28.6 compared to 26.1 last year at this time.
    • Production was down for the week at 12.100 million barrels per day. Production last year at the same time was 10.723 million barrels per day.
    • Imports rose from 6.693 million barrels to 7.612 million barrels per day compared to 7.601 million barrels per day last year.
    • Exports from the US rose to 3.347 million barrels per day from 2.322 million barrels per day last week compared to 2.566 million barrels per day a year ago
    • Canadian exports to the US were 3.484 million barrels a day, up from 3.481
    • Refinery inputs rose during the during the week to 16.676 million barrels per day
  • As at May 10, 2019, US natural gas in storage was 1.653 billion cubic feet (Bcf), which is about 15% lower than the 5-year average and about 9% higher than last year’s level, following an implied net injection of 106 Bcf during the report week
    • Overall U.S. natural gas consumption was up 1% during the report week
    • Production for the week was flat. Imports from Canada increased 9% from the week before. Exports to Mexico were up 3%
    • LNG exports totaled 38.0 Bcf
  • As of May 17, 2019, the Canadian rig count was flat at 63 (AB – 43; BC – 15; SK – 1; MB – 0; Other – 4). Rig count for the same period last year was 79.
  • US Onshore Oil rig count at May 17, 2019 is at 802, down 3 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 2 at 185.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was up 2 at 22.
    • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 68%/32%


Trump Watch: Trade War! Trade War! Trade War! No more steel tariffs for Canadastan!

Kenney Watch (new!): A quick rest before the legislature resumes next week. There’s a lot of paper coming. Oh, and the “War on Fun” is over. Open bar in provincial parks coming soon!

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