For the first time in 44 years, the Progressive Conservative party will not be running Alberta.
Although the polls predicted the victory, many Albertans were shocked the NDP not only overtook the PCs, but that the party stormed into power, taking 53 out of a possible 87 seats in the legislature. The Wildrose Party maintained its status as Alberta’s official opposition, taking 21 seats. The Conservatives slumped all the way down to just 10 seats, with one riding still undecided as I write this.
The NDP ran on a platform of higher corporate taxes (pledging to up the provincial corporate rate from 10-12%), increased spending on social programs, a tiered tax system for the province’s highest earners, and a ban on both corporate and union support for political parties.
But the big concern for investors is the new government’s pledge to review the royalties paid to the provincial government by energy companies. New premier Rachel Notley said she would appoint a Resource Owner’s Rights Commission, which would take a look at Alberta’s royalty rates compared with the rest of the world’s royalty rates, and issue a report within the first six months of taking office.
What does it mean?
Analysts think the upcoming royalty review isn’t a smart idea. Altacorp Capital issued a report this week: “Unfortunately, with Alberta possibly heading for a third royalty change in eight years now, we believe global investors will add a degree of caution with the province’s ability to maintain a stable investable environment.”
Canoe Financial portfolio manager Rafi Tahmazian was blunter: “The national and international community is going to send a sign of some degree and hey, they may surprise me, and I hope they do, but at this point, it’s too late. As an investor in the oil patch, you’re going to get your teeth kicked in, probably. At the very least, negligible returns.”
It boils down to this. If there’s one thing the market hates, it’s uncertainty. And if you combine that with $60 per barrel for crude, it creates an environment where energy producers might just throw up their hands and refuse to drill. With the price of oil so low, there isn’t much room for uncertainty.
This will ultimately filter down and affect the jobs of regular Albertans. If the energy companies virtually shut down drilling in the province until the new royalty regime is announced, thousands of additional employees will get pink slips.
Which companies will be affected?
If you’re worried about this, there are a few companies that you should avoid.
One is Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE), which is now nearly 100% focused on key areas in the province for its production. The company is focusing on the Cardium, Viking, and Slave Point oil fields, which are mostly located in Alberta. If you combine that with the company’s precarious financial position, it could be enough to scare investors away from one of the worst performing oil producers.
The other companies which will be greatly affected are oil sands producers, particularly Imperial Oil Limited (TSX:IMO)(NYSE:IMO) and Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ). Both these stocks are heavily dependent on production from the oil sands, and have sold off nearly 10% in the past couple weeks as it became clearer the NDP would take the election.
The other thing hurting most oil sands operators is higher costs. Most of the easy-to-get oil in the region is now gone, leaving the more pricey stuff. In an environment where prices are high and royalties are low, this isn’t such a big deal. But in today’s environment, it’s easy to paint a relatively bearish scenario for Canada’s largest oil sands operators.
I’m not suggesting investors rush out and sell their Alberta-based oil holdings. I’m still a believer in Penn West’s turnaround, even with higher royalties. But investors have to expect the sector to sell off in the next few weeks, and expect uncertainty in the sector for the next few months. That’s probably not good news for anyone with energy shares.
