the facts lie somewhere between both of you
not really. although i gave an extreme example (CAD/USD appreciating more than CL/USD), even if CL/CAD appreciates while CAD/USD appreciates, the strong CAD is not a help to CAD earnings.
let's say you had two identical oil producers (one US-based and one Canada-based) with identical cost structures and operations and USD-equivalent profits in Year 0. assume the only cost is labor, and assume for simplicity that 1 CAD = 1 USD and 1 barrel of oil = $10, and both cos produce 1 barrel with one hour of labor. then, for both companies:
sales: 1 bbl x USD$10 = USD$10
minus labor: 1 hr x USD/CAD$1 = USD$1
profit: USD/CAD$9
this is the same for both cos since CAD$1 = USD$1 in Year 0 (for simplicity's sake)
now, assume, one year later:
* CL/USD triples, while
* CAD/USD doubles, and therefore
* CL/CAD rises 50%
then, for the US co:
sales: 1 bbl x USD$30 = USD$30
minus labor: 1 hr x USD$1 = USD$1
profit: USD$29
profit converted to CAD: $CAD14.50
and for the Canadian co:
sales: 1 bbl x USD$30 = USD$30
minus labor: 1 hr x CAD$1 = USD$2
profit: USD$28
profit converted to CAD: $CAD14
you can see that the larger the CAD component is in the Canadian co's expense structure, the more vulnerable its profitability is to a stronger CAD/USD. this is why Canadian energy producers list earnings sensitivities to CAD/USD--guess what, the stronger CAD means eps goes down.
i fail to see how the stronger CAD in any way benefits the profits of producers in Canada selling USD-based energy, any more than the strong Rand helps RSA gold miners.
for this very reason, some Canadian producers may hedge currency risk--what could be a clearer indication of this fact.
NB. the above discussion is concerned only with operational profitability. profits aside, in the stock market, of course, Canadian stocks in general may see expanding PEs and such as investors flock to stronger-currency countries, but that's separate from the effects of currency on operating profits. |
