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Canada elected a new majority government led by Justin Trudeau on Monday night, but only some Canadian energy executives will celebrate the historic victory.
Others, according to FirstEnergy Capital, will likely see their valuations suffer.
The Calgary-based investment bank released a report early Tuesday morning noting the TSX Energy Index has fallen six percent more than the global energy index, suggesting “the market has at least partially priced in the election of a new and less industry-favourable Liberal government.”
“However, some investors still wait to ‘sell on the fact’ and so we expect the market to react slightly negatively to the election result.”
Junior exploration and production companies face the most “eminently negative outcome,” the report said. During the campaign, the Liberal Party pledged to eliminate so-called “fossil fuel subsidies”; explicitly noting the Canadian Exploration Expense (CEE) deduction would be altered such that successful exploration results will no longer qualify while the cost of unsuccessful results will still be able to be deducted.
“This is far more important for early stage startups in terms of capital raising, heightened by the fact that early stage growth vehicles often invest far more than cash flow generated,” the FirstEnergy report said. “This policy will further deflate entrepreneurial management teams and their ability to compete with larger entities benefitting from economies of scale, and will definitely not aid in reversing the pressure on smaller firms as evident in a mortifying TSX Venture Exchange Index chart.”
The elimination of preferential tax treatment for exploration spending may also have a “minor negative impact” on rates of return for producers in Alberta’s oil sands, by far Canada’s largest oil and gas bastion. Potential changes to climate change legislation and/or greenhouse gas emission regulations could also be a cause for concern in the oil sands, particularly because the FirstEnergy report notes the Trudeau government “may not necessarily coordinate” GHG policies with those already under review in the province of Alberta.
“It seems reasonable to assume that the GHG cost burden on [oil sands] assets will be more severe than if the Conservatives continued to hold power,” the FirstEnergy report said.
Those oil sands producers with the highest exposure to GHG costs are, in descending order: Canadian Oil Sands, Suncor, Cenovus, Canadian Natural Resources and MEG Energy. Husky Energy and Encana are less exposed, the report said, given a large proportion of their assets are outside of Canada.
On the pipeline front, FirstEnergy expects a Liberal government “will officially rescind” the permit for Enbridge’s Northern Gateway pipeline and will “look carefully” before issuing a permit for Kinder Morgan’s proposal to nearly triple capacity on its Trans Mountain pipeline. The party’s position on TransCanada’s Energy East proposal remains unclear.
Not all Canadian energy executives will see their company valuations decline as a result of the Liberal victory. FirstEnergy expects Prime Minister-designate Trudeau to continue support for liquefied natural gas (LNG) export plans for the British Columbia coast.
Beneficiaries of that continued support for LNG include, according to the report: Advantage Oil & Gas, ARC Resources, Crew Energy, Peyto Exploration, Tourmaline Oil, Painted Pony Petroleum, Storm Resources and Chinook Energy.
The Liberal plan to create a new “Low Carbon Economy Trust” with $2-billion to fund projects that “materially reduce carbon emissions” will also benefit some oil patch players. Canada’s largest renewable power generators (two of which also happen to be the country’s largest oil and gas pipeline builders) could see some positive reaction in their share prices, the FirstEnergy report said. Those companies include Enbridge, TransCanada, Northland Power and Brookfield Renewable Energy Partners.