Stampede week is usually a pretty jolly event for the oilpatch. Beer for breakfast, half days at work and taking clients to the rodeo are part and parcel of doing business during the Stampede. But this year, there's a cloud hanging over the sector. Oil is bumping along around $45 US a barrel, and in many cases share prices are retesting 2016 lows.
'Who knows where the price of oil is going to go? I have no clue. No one should say they have a clue.' - Barry Schwartz, Baskin Wealth Management
"In 2016, we felt we were at the bottom, and it was proven out, into the fall and early part of winter, share prices increased, the TSX energy index increased as a result of that and a few transactions were done," said Jim Davidson, co-chairman of GMP FirstEnergy, a longtime investment bank for the energy sector.
"Today if you took a look at a typical oil and gas company share price, it is lower than it was in July 2016, and it is also lower than it was when oil was $36 a barrel."
For the first years of the downturn, there was continual optimism that, in time, things would get better. That optimism has largely faded, and the gloom seems to be pushing investors out of the Canadian market. More international companies are walking away from the sector as OPEC cannot sustain the price of oil above $50 US a barrel and political change in British Columbia has reignited pipeline politics
'Maybe this is fair value for oil'
The fundamental problem with the oilpatch is that no one can quite figure out where the price of oil will settle. Saudi Arabia has been trying to boost the price ahead of its initial public offering of the state-owned oil company Saudi Aramco, but U.S. producers have been a spoiler, producing so much oil that energy services company Halliburton is warning that it cannot keep up.
"The price of oil is down here for a reason, and the reason is that everyone is drilling like crazy, said Barry Schwartz, chief investment officer with Baskin Financial.
"If you're in the oil business, you're in the business to drill for oil, you're not in the business to shut down wells and wait for better prices. Maybe this is the fair value for oil?"
Schwartz said that Toronto-based Baskin, which manages private investments, decided to divest itself of energy producers in the early days of the downturn.
"It's not a call on good management, or whether the companies are good or bad, it's just a call on the commodity itself," he said. "We still have pipelines because no matter if oil is 10 bucks or 100 bucks, you have to ship it."
Canadian producers have long faced challenges. Costs are generally higher here, especially in the oilsands, and market access is more limited. But it has always been thus, according to Davidson, and in previous downturns the industry has survived.
"All we can do is play with the hand we are dealt," said Davidson. "And historically we are good at it. We have learned to be very cost conscious and develop new technologies to allow us to access new reservoirs in a very old basin. In previous business cycles we have made a silk purse out of a sow's ear."
Davidson argues that this cycle is different because of political challenges, such as Alberta's price on carbon and the difficulty of pipeline construction, which are not being faced in the United States under the current administration. That, he believes, is chasing away foreign investment and setting the Canadian oilpatch "adrift."
"Canada is hamstrung because it's at the end of the pipe," said U.S. investor Stephen Schork. Without another viable outlet for its production, the most obvious thing is to get infrastructure built in B.C. to get Canadian energy to Asian markets. Short of that, the U.S. does remain a more viable option simply based on geography."
Forecasts for oil are mixed
On the positive side of the ledger, demand for oil has been strengthening and one investment bank is calling for $60 US oil by the end of the year, after the North American summer driving season is done and the final numbers are in. However, another investment bank suggests $40 US is the more likely scenario.
That shows the difficulty of picking a price for the commodity.
"Who knows where the price of oil is going to go? I have no clue. No one should say they have a clue," said Schwartz.
With pipelines, prices and politics all out of the oilpatch's control, it's understandable why this Stampede season is all about drowning sorrows.