'Bloodbath' a very shallow pool
Energy investors greet Alberta royalty hike with overwhelming sense of ennui
Gary Lamphier
The Edmonton Journal
Saturday, October 27, 2007
EDMONTON - Half of one per cent. That's it.
After five tortuous weeks of incendiary, anti-royalty hysteria from Alberta's powerful energy industry, the Toronto Stock Exchange's lead energy index has plunged a staggering half a point. As in 0.5 per cent.
No, that's no typo, folks. More like a rounding error. Some bloodbath, huh?
Despite threats of multibillion-dollar spending cuts, massive layoffs and a pending calamity in the oilpatch, oil and gas stocks are virtually unchanged since a six-member panel tabled its report on energy royalties Sept. 18.
Maybe the new royalty framework unveiled Thursday by Alberta Premier Ed Stelmach really has infuriated energy execs and scared the bejesus out of investors, as some alarmists insist. But I doubt it.
Their overblown rhetoric simply doesn't match the facts. As pending economic catastrophes go, this one looks like a yawner.
"We're still pretty upbeat on Alberta's prospects, going forward," says economist Derek Holt, of RBC Financial Group, which recently raised its 2008 economic growth forecast for Alberta to 4.5 per cent, tops in Canada.
"We're not as yet altering our growth forecast over the next couple of years. There might be some higher risks on the investment side (when new royalty rates kick in), but there's enough momentum to keep growth around four per cent next year."
Holt says higher royalties should also help dampen the inflationary pressures that have played havoc with budgets inside and outside the oilpatch.
Meanwhile, on the jobs front, he sees little overall impact on Alberta's economy.
It is true that TSX-listed energy stocks have lagged the uptick in oil and gas prices in recent weeks, which have risen 12.7 per cent and 9.9 per cent, respectively, since Sept. 18. But the runup in crude and natural gas prices has been offset by a simultaneous 5.4 per cent runup in the loonie, which undercuts the benefit of rising commodity prices for Canadian producers.
The bottom line: energy stocks have hit a slight speed bump, after years of record-busting, double-digit gains, as investors calibrate the modest reductions in cash flow and net asset values that will result once the new royalty regime takes effect in January, 2009. So cry me a river.
Fact is, many of Calgary's largest energy firms still boast five-year stock charts that look like hockey sticks. Even as some fear mongers continued to predict Armageddon on Friday, shares of oilpatch giants such as Husky Energy, Canadian Natural Resources and Imperial Oil were on the rise.
Shares of Suncor closed Friday at $102.61 -- just $1.54 or 1.5 per cent below the all-time record high, set last week.
And at $77.02, CNRL's stock ended the week a mere $3 or 3.7 per cent below its all-time high.
Shares of EnCana, Canada's largest oil and gas producer and a vigorous opponent of higher royalties, closed Friday at $64.25, just a hair below the price the stock traded at before the royalty panel issued its report.
Units of Canadian Oil Sands Trust, a major investor in Syncrude, closed at $33.20, just 3.6 per cent below their all-time record high.
Such minor declines, I'd argue, far better reflect the real-world impact of Alberta's new royalty regime than the overblown nonsense that's still gushing from the mouths of a few oilpatch execs and their sycophants.
To their credit, some investment dealers have begun to ratchet down the rhetoric. In a report issued Friday, UBS Securities played down the impact of higher royalties on share prices.
"While still imperfect, the new royalty rates for oilsands are significantly better (read: lower) than the royalty panel recommendations," it said. "The NPV (net present value) of a typical upgraded oilsands mining project declines by 2.7 per cent in a $50 US per barrel scenario, to 5.9 per cent in an $80 price environment."
The impact on producer cash flows is also expected to be small, it says.
"For senior producers and integrateds, our 2009 cash flow estimates decline by one per cent, while trusts benefit from low well productivity, resulting in essentially no change to our cash flows," UBS says. "We expect junior producers to be harder hit, declining by 10 per cent."
Despite the modest impact, UBS says it wouldn't be surprised if energy stocks drop further, as investors digest the significance of the new rates. Its advice? "We would view such weakness as a buying opportunity." Right.
In a report issued Thursday, after Stelmach unveiled his new royalty plan, FirstEnergy Capital said most oilsands stocks had already discounted the impact of the changes in the weeks prior to the announcement, and would likely rebound Friday -- as indeed some did.
"Despite this potential challenge, we do not actually view this change as a material impairment to the longer-term value of the projects, as the effective increase in royalty rates would impact netbacks by less than four per cent, due to the bitumen-based pricing mechanisms," FirstEnergy said.
Got the message, folks? For investors who live in the real world, the royalty story is already yesterday's news. |
