What investors can learn from Trans Mountain and Canada’s pipeline paralysis
For those following the ongoing saga of our nation’s struggle to build oil and gas pipelines, it has been quite an emotional ride. Sunday’s announcement by Kinder Morgan that it needs assurances by the end of May that the B.C. provincial government will not cause further delays in the development of the Trans Mountain expansion project was just the icing on the cake.
Looking back on how we got here, we think both the government and industry share in the blame and that there are some important lessons investors can learn from what has transpired.
Bull markets motivate disruption
The worst thing that can happen for an industry, especially one that is a price taker, is a prolonged and unsustainable bull market. The perfect example of this was when oil prices skyrocketed over $100 per barrel and all of the talk was about how “this time was different” due to peak oil theory. As a result, Canadian oil companies were making so much money that most didn’t focus on cost control or think ahead by questioning the sustainability of the high-cost growth and associated logistics.
Meanwhile, the shale revolution south of the border took off allowing our only customer to rapidly add domestic production so much so that they added the equivalent of Canada’s entire production in less than a decade. And here we are today where our only customer has all of the capital they require, immediate access to refining and export capacity, significantly less regulations, and recently reduced corporate tax rates.
In a nutshell, our customer has become the disruptor and it may be altogether too late to do anything about it.
Capital partnerships should be mutually beneficial
In our opinion, we missed a huge window of opportunity with the flood of Asian capital into Canadian resources. Rather than try and build mutually beneficial long-term relationships we took advantage of this unsophisticated capital by selling them marginal projects and companies at ridiculous prices.
After being burned is it any surprise that this capital has all but dried up? Perhaps if we kept them around they would have made good partners to tackle the ongoing exodus from our country’s better quality projects instead of our domestic companies taking on debt and trying doing it ourselves. Perhaps even a three-way partnership could have been formed directly between government, these capital providers and industry in the infrastructure build-out to enable access to Asian markets?
Don’t own industries overly reliant on requiring governments to act responsibly
Complacency in our provincial and federal governments, which were blinded by strong royalty and corporate tax revenues, has not helped the situation. With pipeline projects deemed a political hot potato most were content to simply talk about putting shovels in the ground, rather than ensuring it actually happened.
We should give some credit to the current Alberta and federal governments for at least attempting a different tactic by deploying an offer of carbon taxes in exchange for pipeline approvals.
Unfortunately, this is looking to be a disastrous move with the worst possible outcome of no pipelines but an additional cost layered on an industry struggling to break even in the current oil-price environment.
While Alberta has been vocal, it is really up to the Federal government now to ensure B.C.’s compliance with the build-out of the Trans Mountain pipeline and yet at this stage all we have had is tough words and little action.
Interestingly, other sectors in Canada such as banking and telecommunications have received strong government support and operate in a much more favourable environment, such that they are protected from disruptive threats.
That’s not to say that this will continue indefinitely: Investors might be wise to study what has transpired in our once strong and robust energy sector for potential warning signs.
Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.