A Look Back at the Big Business Stories of a Wild Year • Year In Review
E NERGY ’ S U PS AND D OWNS While the big oil and gas companies may have enough cash on hand to see them easily through the next few months of economic uncertainty after a gusher of profits from the summer quarter, many leaders in the sector are now pulling back on any new spending as they prepare to also deal with a new royalty structure in 2009. Those hit hardest by recent economic events in the energy sector are the juniors. “It’s pretty hard to be optimistic right now,” says Gary Leach, executive director of the Small Explorers and Producers Association of Canada (SEPAC). “With everybody fearing a much more severe recession, it’s had a huge knock-on effect on the price of oil.” From $147 to around $60 per barrel, the uncertainty took an immediate toll on crude and natural gas prices. For the juniors, it means a lack of new startups, he says, along with fewer consolidation deals because nobody can seem to accurately place a value on a company whose stock price went swinging up and down in the last half of 2008. “For the juniors, it’s worse because they are much more frequent visitors to the equity market raising capital and when your stock price used to be $4 and now it’s $0.40, you can imagine how many investors are reluctant to put more money in,” says Leach. When juniors are able to raise money in the conditions prevalent in the last half of this year, it became much more expensive since they had to give away much more equity to raise the same amount of money. It was definitely a year of extremes in the oilpatch. “In the first half of the year, there was growing optimism,” says Leach. “The first quarter of 2008 was overshadowed by the very divisive and disappointing outcome of the Alberta royalty policy announcement” in 2007, he says. “It was already going to make a lot of drilling opportunities in Alberta not competitive … meaning it really damaged the business model for a lot of Alberta-based juniors.”
While natural gas prices and crude prices rose throughout the first half of the year, “it all rolled over (and) prices fell off the cliff,” making new investments in Alberta’s energy sector less economically viable. “There’s not a whole lot of new oil production that’s viable and at these natural gas prices, not a lot of new natural gas drilling in Alberta,” Leach says. “This is about the highest cost place in North America to produce both of those commodities. When we layer the new royalty framework on top of it, we’re at some risk of making Alberta even more marginally economic than it is now.” The energy sector was built with guys who know they’re in a risky business, but the level of uncertainty in the industry in 2008 made it a tough year all around, even with record oil prices in the summer that were wiped out in the months that followed. Big or small, it’s difficult not to be pessimistic for energy companies after a roller-coaster of a year.
F INANCIAL W RECKAGE Even amid the carnage from the global financial downturn, Canada’s banks were rated as the most economically sound in the world because financial institutions here did not have nearly the same amount of exposure to the sub-prime mortgages that caused so much of the current economic mess. Still, it’s hard to remember when the finance sector was in such rough shape. “By most people’s benchmarks, it’s been the most destabilizing event for the big financial and banking centres since the 1930s,” says Leach. It’s important to note, as TD’s deputy chief economist, Alexander points out that despite global turmoil, the picture at home in Canada isn’t as bleak as it is elsewhere. “What’s happening in Canada is completely different than what’s happening in the U.S. and Europe,” he explains. “In the Canadian context, the Canadian financial institutions have been hit indirectly by what’s happening and that has increased the cost of doing business.”
Mr. Detail
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