Invesco Canada blog

Insights, commentary and investing expertise

Norman MacDonald | May 11, 2015

Finding opportunity in Alberta’s NDP win

The NDP’s majority win in the Alberta provincial election definitely caught me by surprise – and this reaction is clearly visible in the stock market as well, with weakness in energy names across the board in the last few days. The market doesn’t like uncertainty and with this new government in place the policy changes are expected to be gradual so this uncertainty could last for a while.

New policy changes impacting oil and gas companies will likely be introduced, but it is still far too early to know the implications. This fear creates opportunity for long-term investors and we are definitely seeing that opportunity in certain core holdings within Trimark Resource Fund and Trimark Energy Class.

I expect the new government will increase overall corporate tax rates, and this will obviously impact all oil and gas companies with head offices in Alberta. The other area where new policies could crop up is the top-line royalties paid to the Crown. (Petroleum and natural gas companies pay royalties to the provincial government in exchange for the right to drill or mine on Crown land). This taxation could take a two-prong  approach involving:

  • Higher absolute royalties
  • The government taking away certain “royalty holidays” that the oil and gas companies have enjoyed in the last six or seven years, which have promoted a good deal of industry activity through incentivizing deeper drilling

I do, however, think the government will be rational when looking at royalty structuring, given the fiasco the Edward Stelmach government experienced when it introduced the “Our Fair Share” policy changes in 2007.

The other potential policy changes that could impact oil and gas companies are those relating to governing greenhouse gas emissions and other environmental issues faced by the oil sands companies. In my opinion, this is one of the larger issues that is difficult to quantify.

Let’s take a step back for a second though, and think about the fact that this new government did not wake up this morning and say, “Okay, let’s go get the oil and gas industry and take them out to the woodshed and jack up the taxes.” The oil and gas industry is still the key driver of the province’s economy and the industry isn’t financially sound right now given the fall-off in commodity prices.

Alberta doesn’t have a sales tax, so if looking for new revenue streams, the new NDP government could start with a consumption tax. I believe that any attack on the oil and gas companies will lead to a scaling back of activities in the sector, which would have a ripple effect throughout the economy – impacting oil service companies, trades people and ancillary businesses.

A good way to frame this is with an example. One of the bigger holdings in both of the funds I manage is Trilogy Energy Corp., which has 100% of its production in Alberta. In 2014, Trilogy paid $70 million in royalties to the Crown in a robust crude environment and on the news of the NDP victory the company lost $120 million in market capitalization (the one-day stock decline on the day following the May 5 election). Source: Invesco Canada.

When we look at these types of situations, we are opportunistic and don’t let emotions dictate our investment decisions.

If you have any questions, please feel free to leave them in the comments area below.

The company discussed was selected for illustrative purposes only and is not intended to convey specific investment advice.

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