So now that that whole Drumpf election is behind us, I guess it is time to pick up the pieces of our shattered psyches, pick our collective jaws out of the dirt and figure out exactly what is going on, what may happen, what will happen and how much we should be worried about.

 

As it regards social commentary and the fitness or unfitness of a candidate for a position, their moral compass and whether their supporters are cut from the same cloth or not, much ink has been spilled by far smarter and more passionate people than yours truly. I know where I stand on that front and I am comfortable there. You can likely surmise that from previous writings. I also acknowledge that not everyone shares my views. And I’m OK with that too. Far better to be in a world where everyone is free to express their ideas no matter how wing-nutty, controversial or pre-medieval they may be than to be in one where you can’t express those views.

 

I am also by nature pragmatic. And as a financial observer, there may be aspects of the Drumpf platform, such as it is, that I find interesting or may actually be a net postive for me, my family, my business and my industry.

 

As partners in a people business, Dave and I are confronted on a regular basis by people of all stripes, backgrounds and political persuasions and in a busy interactive world like ours, the likelihood of agreeing with them on all matters is in fact very low. Our job is to help them connect and find ways to achieve mutual financial advantage. That’s part of what makes our business so much fun.

 

We also get paid by our clients to be smart and informed about the energy industry in general and energy services in particular, and the outside influences that will impact it.

 

So policy and platform matters, no matter the character and moral fibre of the person implementing those policies, whether Barack Obama, Hillary Clinton, Donald Drumpf, OPEC Ministers, Rachel Notley, Pierre (oops) Justin Trudeau or Vladimir Putin.

 

So, long preamble longer than it needed to be, the following is a preliminary gut check on those policies a Drumpf administration may look to implement that have the potential to impact the livelihoods of our clients, families, business, industry and province.

 

Energy – Fossil Fuels

A cornerstone of the Drumpf campaign was energy independence and a commitment to energy security. As opposed to Barack Obama’s “all of the above” approach, Donald Drumpf spoke specifically about unshackling the fossil fuel sector from over-burdensome regulation, technology, encouraging increased drilling on federal land and specifically attempting to reignite the coal industry.

 

While I remain unconvinced that Donald Drumpf actually understands what all that means, from a Canadian and Alberta perspective, the blanket approach is a double-edged sword. While increased activity in the United States will stimulate demand for goods and services in Canada and may lead to spill-over effects in our patch, increased activity may also increase supplies and hold back capex in relatively higher cost locations in the WCSB, potentially delaying a recovery.

 

On the coal side, if that is where Donald Drumpf wants to hang his energy legacy, that’s just fine. Demand for and use of coal is in a secular decline in North America for many reasons, one of them is price. Prolific natural gas plays in the United States and Canada have made natural gas generation so cost competitive versus coal, it is hard to see how to regain that market share. This may be a policy that is too late to have much impact, no matter what the voters in coal-dependent regions think.

 

For Canada/Alberta? Fossil fuel extraction support? Positive. Coal? Well we have lots, but not sure we’re included. Net benefit? Probably neuitral without other legs.

 

Energy – Renewables

As it regards renewables, the momentum on that front appears to favour the abolishing of subsidies and allowing renewables to compete “on their own economic merits” with traditional fossil fuels. This is, of course, music to the ears of fossil fuel companies that have a cost advantage, especially in the transportation sector, but the reality is that in electricity generation, wind and solar are becoming more competitive with other types of power generation on a non-subsidized basis, so rather than some radical policy, the idea of scaling back subsidies may be an idea whose time has come anyway.

 

Renewable power – wind, solar, EV’s etc. is where a lot of the innovation and spend is happening and efficiency gains are gathering steam – the horse has left the barn so to speak, so there isn’t much that can be done to slow that industry, even if someone wanted to. There is an argument that without subsidies that research will stop, but that is coming by and large from people who like free money.

 

From a Canadian perspective, to the extent that Canadian companies are able to step to the fore and provide competitive products, this again is positive.

 

Energy – Infrastructure

This is actually the one area that presents a significant positive development to the Canadian energy industry. During the election campaign and in the few areas of officially published policy, Drumpf has vowed to eliminate red tape and support the infrastructure required to deliver energy, specifically indicating a “first 100 days” approval of the Keystone XL pipeline. As with anything Trumpian, there is a catch, as he indicated he would “seek a better deal”, whatever that means. Keystone XL is already a good deal for the United States, the jobs and taxes that will come out of its construction and maintenance are badly needed and significant and its approval would a be a tremendously welcome shot in the arm to the Canadian oil patch and the Alberta economy. It is estimated that a functional Keystone XL might reduce the differential between Western Heavy Select and WTI by up to $5 a barrel.

 

So what might a “better deal” look like and is it even possible? Remains to be seen, but this is a priority for the new administration and for TransCanada and the Western Canadian oil patch was dead in the water on Monday November 7th.

 

Climate Change

There is little doubt that Climate Change is the big loser in a Drumpf environment. Donald Drumpf has vowed to pull out of the Paris Accord, has speculated that manmade climate change is a hoax. plans to put handcuffs on the EPA and halt the defence of the constitutional challenge in federal court of the highly contentious Clean Power Act. Put another way, his proposed changes on the Obama environmental legacy make what he plans to do with Obamacare seem like fine-tuning. This puts the whole environmental movement back on its heels and takes significant pressure off not only major polluters like China and India to clean up their own act, but pretty much everyone else.

 

As a leader in the fight against and implementation of strategies to combat climate change, Canada now finds itself in the awkward spot of having cozied up to a country and set of policies that are now being tossed out the window. This creates a hard set of decisions for both provincial and federal governments who need to balance the desire and need to continue with reduction policies supported by a majority of Canadians and protecting the economic interests of those same Canadians who are going to possibly see their competitive position deteriorate relative to the elephant next door.

 

It is hard to see how this is in any way a net positive for Canada.

 

Taxation

And the above of course leads directly to taxes. Donald Drumpf has promised to lower taxes on individuals and business significantly, close a number of loopholes, allow American companies to repatriate foreign cash and profits for a one-time flat penalty and generally establish a fiscal platform that makes the United States very competitive on a global basis. Against this backdrop, the level of taxation in Canada has risen significantly in the past few years, with personal and business taxes rising at both the provincial and federal level. In addition, provincial and federal governments have established or targeted the implementation of carbon taxes that would have made Canada less competitive on a relative basis than their biggest trading partner and competitor had Hillary prevailed – under Drumpf it could be much more significant.

 

Some serious second and sober thought is required across the country about how to address this looming fiscal imbalance if we don’t want to run the risk of seeing some core industries hollowed out and moved. This isn’t alarmism, it’s reality.

 

Trade

Trade is the last big plank of the Drumpf agenda, with the repeal or renegotiation of NAFTA front and centre stage.

 

On this, I’m kind of with Trudeau and his response. We should always be looking at trade deals to make sure they’re working. There are parts of NAFTA that are irritants in Canada as well. We can say this because ultimately the problem the United States and the industrial heartland has with NAFTA isn’t with high cost, high wage, high tax, uncompetitive Canada, it’s with low cost Mexico. In many ways we are just viewed as a (high cost) extension of the American economy – this is why the rhetoric about throwing out trade agreements and a new cross-border pipeline to import more Canadian crude isn’t contradictory. We are America’s hat after all.

 

Jobs aren’t leaving Detroit, Michigan to go to Belleville, Ontario. They are leaving Detroit and Belleville to go to lower cost, non-union jurisdictions in the American South and to Mexico. If anything, this supply chain integrated, manufacturing powerhouse corridor should act in concert to protect its mutual interests if as a region they want to survive. Just ask Hillary – Canada and the US are actually Stronger Together.

 

So in all, I guess I would say on balance, Canada could see a net economic benefit from a Drumpf presidency on the energy side and a net economic benefit if we can somehow solve the tax riddle and the climate file. A tough nut for sure, but we have been beside this beast in its many incarnations for almost 150 years and we are still here and as a nation, we are the envy of many and we figure out how to prosper no matter what.

 

It is going to be a transformative four years.

 

Prices as at November 11, 2016 (November 4, 2016)

• The price of oil ended a bad week down on a US dollar rally post election and a renewed focus on OPEC and challenges to implementing cuts.
  • Storage posted a modest and expected increase
  • Production jumped more than the typical week over week change
  • The rig count was flat
• Natural gas was down during the week as the market continues to trade on weather projections

• WTI Crude: $43.41 ($44.07)
• Nymex Gas: $2.619 ($2.767)
• US/Canadian Dollar: $0.7383 ($ 0.7460)

 

Highlights

• As at November 4, 2016, US crude oil supplies were at 485.0 million barrels, an increase of 2.4 million barrels from the previous week and 30.2 million barrels ahead of last year.
  • The number of days oil supply in storage was 31.2, same as last year’s 31.2.
  • Production was up for the week at 8.692 million barrels per day. Production last year at the same time was 9.185 million barrels per day. The change in production this week came from a slight increase in Alaska deliveries and a big jump lower 48 production.
  • Imports fell to 7.442 million barrels a day, compared to 7.337 million barrels per day last year.
  • Refinery inputs were up during the week at 15.817 million barrels a day
• As at November 4, 2016, US natural gas in storage was 4,017 billion cubic feet (Bcf), which is 5% above the 5-year average and about 1% higher than last year’s level, following an implied net injection of 54 Bcf during the report week.This level isa new all-time high.
  • Overall U.S. natural gas consumption was up 3% during the week as higher power demand offset declines in industrial and residential demand.
  • Production for the week was flat and imports from Canada fell by 10% from the week before
• As of October 31, the Canadian rig count was at 151 (23% utilization), 102 Alberta (22%), 17 BC (22%), 30 Saskatchewan (26%), 1 Manitoba (7%)). Utilization for the same period last year was about 25%.
• US Onshore Oil rig count at October 28 was at 452, up 2 from the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was down 2 at 115.
  • Rig count at January 1, 2015 was 328
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 55%/45%
• Offshore rig count was flat 21
  • Offshore rig count at January 1, 2015 was 55

 

Drillbits

• Selected earnings reports for Q3 – it’s a mixed bag!
  •  Crescent Point reported Funds from Operations for ther quarter of $368.1 million vs $$483.5 in the same quarter last year. The COmpany also expanded its capital program for 2017 from $950 million ot $1.4 billion.
  • Peyto Exploration reported Funds from Operations of $128 million versus $135 million in the same quarter last year. Earnings of $23 million represent the company’s 47th consecutive quarter of positive earnings.
  • Birchcliffe reported Funds form Operations of $41.7 million for quarter compared to $44.6 million in the same period last year.
• Globally, electric vehicle sales are rising quickly, hitting 550,000 units in 2015. China is now leading the way on EV sales.
  • They are growing from a small share, however. The estimated impact on oil demand from all the EVs sold in 2015 is equivalent to displacing about 0.01 mb/d of oil.
• Oil stocks fell across the OECD for the second consecutive month in September, signaling a firmer tightening of global supply surplus.
  • Oil inventories dropped by 34 million barrels in August and September, the largest two-month drop in almost three years, according to the IEA.
• Provincial government/taxpayer owned Alberta Treasury Branches (ATB) made an equity investment in GlassMasters AutoGlass, in partnership with Western Investment Co of Canada Ltd. through its newly formed private equity arm ATB Capital.
  • Western Investment Co. is a junior capital pool company founded by principals of Western Financial, an Alberta-based insurance and financial company, including founder Scott Tannas and former MLA and provincial cabinet minster Jim Dinning, it’s purpose is to invest in and grow Western Canadian based companies.
  • ATB Capital represents ATB’s continued expansion/investment into typical private sector banking activities including investment banking (Altacorp), mid-market, private company M&A (ATB Corporate Financial Services) and investment management (ATB Investor Services).
• Drumpf Watch: Seriously?