Alberta election 2015: Energy sector braces for change with NDP win
After Alberta votes in its 1st NDP majority government, energy stocks take a beating
Alberta's energy sector is bracing for change, as the Progressive Conservatives' more than 40-year reign comes to an end. In their place — the NDP.
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Rachel Notley's NDP government is expected to have a different approach to managing corporate Alberta, in general and the oilpatch, in particular. Energy royalties are on the table, corporate income taxes will increase, and bitumen pipelines will lose at least some direct government support.
"As an investor in the oilpatch, you're going to get your teeth kicked in," said Rafi Tahmazian with Canoe Financial.
The initial reaction from the markets is negative.
The TSX opened Wednesday morning down by triple digits and closed the day down 150 points. The price of oil traded above $62 US per barrel for the first time in nearly five months but the energy sub index dropped by three per cent. Oilsands players such as Cenovus are taking a harder hit, down nearly five per cent.
This is not a surprise as investors hate uncertainty and there is now uncertainty in Alberta's oilpatch.
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As an investor in the oilpatch, you're going to get your teeth kicked in.- Rafi Tahmazian, Canoe Financial
Notley said during the campaign that she would initiate a review of Alberta's energy royalties, a regime that has a reputation for charging energy companies low royalties, relative to other energy jurisdictions.
It is also a system that is extremely complex, with every oil and gas well in the province paying a tailored royalty based on energy prices, the depth, type and age of the well and how much it produces.
Notley's stance on royalties threw the energy sector into high alert, in part because of the poorly managed royalty review of 2007, which led to further royalty changes in 2010.
"It's our perspective that a review is not required at this time," said Jeff Gaulin, spokesman for the Canadian Association of Petroleum Producers (CAPP). "And it would, in fact, create uncertainty at the very time that it would destabilize jobs in Alberta. So we don't think a review is required at this time and we hope that it would be taken off the table."
Altacorp Capital, a Calgary investment bank that is partly owned by the provincial government, expressed a similar view in a report earlier this week, before the election.
The report pointed out that energy investors, especially those based outside of Canada, have lots of options when it comes to investing.
"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."
Notley said that she will appoint a resource owner's rights commission that would propose recommendations for a new provincial royalty structure within six months.
Corporate income taxes
Another key plank in the NDP platform was around the corporate income tax rate, which it pledged to increase to 12 per cent, from 10 per cent .
Amber Ruddy, a senior policy analyst with the Canadian Federation of Independent Business, said she hopes small businesses will see a break.
"I understand that they need to balance their budget," said Ruddy. "But we have to think of the independently owned businesses, they can't be caught up in this economic downturn and have the government piling on."
The burden of that corporate income tax increase will be borne by the energy industry, something that CAPP is also unhappy with.
"We have long said that increased cost burden on industry at this time is very sensitive," said Gaulin. "Jobs have already been lost in Alberta, jobs are further at risk in Alberta."
At the end of the day, energy stocks were down by 2.75 per cent, not as low as some had expected.
"I didn't see panic selling today at all," said Sheryl Purdy, an investment adviser with Leede Financial Markets. "They did not get clobbered."
Energy stocks were down, but Purdy figures it could have been a landslide of selling. She is advising her clients to pay attention to the change in government.
"NDP policies are not business friendly," said Purdy, suggesting some clients might think about starting to invest in Saskatchewan companies.