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In cased you missed it: Much as oil spilled from a broken pipeline will slowly seep into topsoil, the effects of the ongoing crash in crude prices is spreading across the Canadian economy.
The more obvious consequences – billions of dollars in lost profits among oil and gas producers, plummeting home values in petroleum-extracting regions, tens of thousands of energy workers made jobless – have been well telegraphed and documented. With the downturn now firmly in its second year, other sectors entirely unrelated to oil and gas are also beginning to suffer.
Insurance and telecom companies have generally been considered safe havens for investors fleeing commodity producers, but quarterly results released by two companies early Thursday morning revealed the cracks that are beginning to form.
Manulife Financial (MFC.TO) missed expectations for its fourth quarter profit by roughly 8 percent. The Toronto-based insurance giant’s results included a $361-million charge, which the company attributed to the impact of “sharply lower” oil and gas prices on its investment portfolio.
“Unless energy prices strengthen, it will be difficult for us to achieve the $4-billion core earnings objective we have set for 2016,” said Manulife CEO Don Guloien in a statement. “We expect that some macroeconomic headwinds and energy price volatility will persist.”
Has the collapse in crude prices affected your household? https://t.co/wHsMI1lORS— BusinessNewsNetwork (@BNN) February 11, 2016
Vancouver-based Telus Corp. (T.TO) added 62,000 net new postpaid wireless subscribers in the final three months of 2015. Taken on its own, the figure sounds like impressive growth, yet it is down 48 percent from the same period one year earlier.
The company attributed the disappointing result to “the economic slowdown, particularly in Alberta.” CEO Darren Entwistle described the fourth quarter results as “solid… despite economic challenges.”
Even companies only loosely related to oil and gas, such as diversified miner Teck Resources (TCKb.TO), are feeling significant pain. The company owns 20 percent of the Fort Hills oil sands mining project operated by Suncor that is expected to come online next year, but in the meantime the exposure forced Teck to take a nearly $600-million charge in the fourth quarter and despite the minority ownership, oil sands mining assets are so expensive that Teck still has $1.2-billion in remaining Fort Hills funding commitments.
Of course, the most dramatic consequences are being felt by actual producers of oil and gas. Cenovus (CVE.TO), for example, reported an operational loss Thursday that was nearly double what analysts were expecting and the situation in energy is guaranteed to get far worse before it gets better: the quarterly results coming out now are based on fourth-quarter production when oil prices were still in the mid-to-high US$40 per barrel level.
When oil and gas producers release the results of their performance in the first quarter of 2016, where prices have been hovering near the US$30 per barrel level and often lower (which is well below the average break-even level for Canadian production in the mid-to-high US$30s), the worst financial carnage to date will come to light.
Canada’s big six banks – long upheld as bastions of stability since they came through the 2008 global financial crisis relatively unscathed – may provide a preview of how far the contagion has spread when they begin to report quarterly results in the next few weeks. They have been downplaying their exposure of loans to now-struggling oil and gas producers since the downturn began, but that could be about to change.
Collapsing commodity prices will “ultimately shock Canadian household income and home prices,” National Bank Financial warned in a 56-page report published earlier this week. The report argues Canadian banks have prospered in recent decades largely due to a financial regime centered on Canadian households taking on more and more residential mortgage debt, pushing home prices higher and overall household debt levels to record levels.
“One would do well to ask, then, what might cause this regime to end?” the report asks.
The answer, it seems, will likely prove related in no small way to the ongoing crash in crude oil prices.