Signature energy outlook

Bob Lyon's picture

The Alberta NDP campaigned during the recent provincial election on several issues that are not particularly constructive for the oilpatch. A few of the party’s key platform items that directly affect energy companies include:

  • an increase in the corporate tax rate from 10 to 12%
  • a review of the current royalty system. The NDP has said, “the Progressive Conservatives have refused to implement realistic oil royalties that the people who own the resource deserve”
  • no support for the Northern Gateway and Keystone pipeline projects.

Following the NDP’s election win on Tuesday, May 5, the companies that are most likely to be affected by these policies experienced a decline of 5-6% after first couple days. These include oilsands companies, which generate over 50% of Alberta royalty revenue, and the Montney deep-basin players that benefit from very generous drilling credits. The S&P/TSX energy sub-index, meanwhile, was down 3.5% and the S&P 500 Energy Index was down about 1.5%.

Canadian companies that should weather this situation a little better are those with comparatively little production in Alberta. These include large-cap names such as ARC Resources, Encana and Crescent Point, and smaller caps such as Raging River and Painted Pony.  Non-Canadian companies, which currently comprise about 65% of our energy holdings within Signature Global Resource Fund, should not experience any direct impact as a result of the election.

The pipeline issue is probably not an overly large one. Neither the Northern Gateway nor the Keystone pipelines were getting any traction, even with the strong support of the previous provincial government. The income tax increase, meanwhile, has been immediately reflected in the share prices, so on this particular item the damage has likely been inflicted already.

The greater question is what will happen to royalties? While they will almost certainly go up, it is impossible to quantify at this point. The government has promised to undertake a six-month study of the matter, and to then implement changes within six months after that, so markets will be dealing with a pretty significant "unknown" for up to a year. Alberta Premier-elect Rachel Notley has come across as a rather moderate New Democrat. However, with an inexperienced cabinet and a number of new MLAs trying to "make their mark,” there is a risk of a policy over-reach that could be damaging to the sector.

At the end of the day, the Alberta oilpatch should experience a higher cost structure. Until we receive more clarity on the royalty issue, investors are likely to place a discount on Alberta-focused energy companies.

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