‘Borderline treasonous’: Oil executives sound alarm as foreign investors flee

CALGARY — Canadian energy executives are becoming increasingly vocal about the country losing its competitive edge relative to their peers in the United States, saying it’s “very, very worrisome” that investors are exiting the domestic energy sector.

“If the people of Canada think for one moment that we can only have Canadian investors and hope to drive any type of business going forward, they are absolutely, massively mistaken,” Grant Fagerheim. president and CEO of Whitecap Resources Inc., said in in an interview about the exodus of foreign investors in the domestic oil and gas industry.

Their concerns were echoed by a foreign institutional investor in a letter to Prime Minister Justin Trudeau that was shared with the Financial Post. The letter marks the second time in recent weeks a fund manager outside of Canada has directed their concerns to Trudeau.

“Moving forward, I hope your government will start to recognize the numerous issues that are affecting Canada’s energy sector, and do everything in its power to support an industry which has benefited Canadian prosperity for a long period of time,” Susan Johns, a U.K.-based fund manager, said in the letter, dated Nov. 7.

It follows a similar note last month by Darren Peers, an analyst and investor at Los Angeles-based Capital Research, a US$1.7-trillion fund, which criticized Ottawa for allowing Canadian energy competitiveness to lag.

Johns, who was previously with London-based Consulta, but is now running her own fund called Susan Johns LP, stated in her letter that she has invested in Canadian junior and intermediate companies for more than 30 years.

It is “hard for me to watch such a vibrant industry being strangled by regulation, carbon taxes and the inability of producers to get their product to world markets,” she said in the letter.

Fagerheim said Johns is a household name among junior and intermediate energy CEOs in Canada. Johns did not respond to a request for comment.

In his Oct. 19 letter, Peers said that while he recognizes that Ottawa “has done a lot to maintain Canada’s competitiveness as a country to invest in, when it comes to energy it has not done enough.”

Executives said the two letters should create a sense of urgency that Ottawa needs to take corrective action quickly.

“It is very, very worrisome what is happening to the energy industry in Canada from a competitiveness perspective. That worry for me is even more exacerbated when I look at what’s happening south of the border,” said Cenovus Energy Inc. president and CEO Alex Pourbaix.

Pourbaix said the U.S. government is working to streamline permit applications there and “Canada ignores these red flags at its peril.”

“No one is required to invest in Canada,” Pourbaix said.

Eric Nuttall, Toronto-based senior portfolio manager with Ninepoint Partners, who invests in Canadian oil and gas stocks, said “it’s not surprising” that other fund managers are coming forward with their concerns.

“It’s mystifying to me why there still doesn’t seem to be action taken,” Nuttall said. “It’s borderline treasonous.”

But energy executives say fund managers and investors don’t normally like to be in the limelight. Pourbaix said instuitional investors don’t normally embark on letter-writing campaigns, and other executives agreed.

“I don’t think investors like to be in the public eye with their investment risks and strategies. I don’t think it’s common behaviour,” said Precision Drilling Corp. president and CEO Kevin Neveu.

Neveu said all of the country’s investment banks track investment flows in and out of Canada, and the numbers show there’s very little flowing into the country’s oil and gas sector. That should be alarming to Ottawa, he said.

“Our government doesn’t need investor letters to show them what is going on — the data is there,” Neveu said.

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Ford government’s first fiscal update sees Ontario changing business tax policies

The Ontario government proposed on Thursday to take steps to try to shore up the province’s competitiveness for business investment.

A fiscal and economic update tabled Thursday at the Ontario legislature says the province would mirror the federal government if Ottawa opts to offer companies accelerated expensing of depreciable assets, which is a policy that corporate Canada has been requesting.

“This would support jobs and growth opportunities in Ontario and strengthen Ontario’s competitiveness in the global economy,” noted the province’s 2018 economic outlook and fiscal review, a sort-of mini-budget tabled Thursday at Queen’s Park.

The province’s finance and economic development ministers had already written to the federal government calling for the accelerated depreciation. There have also been rumblings that Ottawa is preparing some measures aimed at Canada’s competitiveness in its own upcoming fall update.

Ontario’s update said Thursday that reform in the U.S. have wiped out the province’s “tax advantage” and made the province less attractive for business investment.

Yet in keeping with the work of new Premier Doug Ford, the Ontario update also proposes to try to undo some of the work of the province’s previous Liberal government.

For example, today’s Progressive Conservative government at Queen’s Park says it is proposing to break ranks with Ottawa on another measure: phasing out access to the federal small business tax rate based on how much passive investment income is earned by a corporation.

Ontario had proposed to match this measure for the province’s own small business deduction, which the government estimated would have hiked taxes on those smaller firms by about $160 million a year by 2020-21. Now, the Tories say they plan on ditching this move, and not paralleling Ottawa’s decision.

The new government also says it will be reviewing its research and development-related tax support and will not implement the previous regime’s plan to link the rates of an R&D and innovation tax credit to a company’s level of investment.

This is all in addition to the savings that the new regime says they are providing to businesses by cancelling the province’s cap-and-trade carbon-pricing system, as well as by freezing Ontario’s minimum wage at $14 per hour. Businesses are also set to pay less in the way of Workplace Safety and Insurance Board premiums.

Under the watch of Premier Ford, Ontario would also no longer “stand in the way” of pipelines transporting oil to or through the province from Western Canada, the update says.

Fedeli’s remarks to the legislature said that Ontario would “unilaterally relinquish our veto over new pipeline construction within our borders.”

“Pipelines create good jobs, both in Ontario and across the country,” added the update. “In every way possible, Ontario will support its partners looking to expand oil distribution, and at the same time, protect their competitiveness from the federal carbon tax.”

Ontario’s former Liberal government had projected a $6.7-billion deficit for 2018-19 in its spring budget, with no plan to balance the books until 2024-25. The Liberals had also forecast a $600-million surplus for 2017-18.

But Ford’s government had ordered up an independent inquiry into the province’s finances after winning a majority in June’s election. The commission of inquiry revised the province’s financial figures, pegging the projected deficit for 2018-19 at $15 billion, and the Tories declared that Ontario actually ran a $3.7-billion deficit for 2017-18.

The fall update now says that the province is projecting a $14.5-billion deficit for 2018-19, down $500 million from what the inquiry laid out. When the province would return to a balanced budget under Ford, or if it would this term, remains to be seen.

Also in the province’s fall update was a new tax measure for lower-income Ontarians, the Low-income Individuals and Families Credit, or LIFT credit, which the government said would result in a single, full-time worker making minimum wage would pay no provincial personal income tax in Ontario.

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Sears secures extra $350 million for the start of the holiday sales season

Sears Holdings Corp. has a commitment for another piece of financing to keep it operating in bankruptcy, just as the critical holiday season begins.

Great American Capital Partners, a finance company, agreed to provide a US$350 million bankruptcy loan, according to a court filing Wednesday. The financing would come at a steep price, charging Libor plus 11.5 per cent and a 3 per cent closing fee. The interest is payable monthly, with an eight-month maturity and four-month extension.

Sears needs the cash to stay afloat during its most important selling period and buy time to develop a long-term survival plan. Sears filed for bankruptcy protection last month with only US$300 million in so-called debtor-in-possession financing.

“The holiday season, the weeks coming up, are really critical for the company and its ability to reorganize,” Sears lawyer Ray Schrock said in a bankruptcy court hearing Thursday.

Chairman Edward Lampert is working on a bid for some of the company’s best-performing stores, which could involve swapping his debt holdings for the outlets. Lampert, through his hedge fund ESL Investments, owns the majority of Sears’s debt in addition to being the biggest shareholder of the Hoffman Estates, Illinois-based retailer.

Great American, owned by the B. Riley Financial Inc. investment bank, provides financing and often serves as a liquidator when a retailer collapses. It was among the firms that helped dismantle Bon-Ton Stores and Gordmans Stores.

The case is Sears Roebuck and Co., 18-23538, U.S. Bankruptcy Court, Southern District of New York (White Plains).


Walmart just reported a big boost in sales and a rosy outlook — and that should make Amazon nervous

Walmart Inc. sailed into the holiday season with stronger-than-expected sales and a boosted full-year outlook, signalling that the world’s largest retailer can more than hold its own against rival Amazon.com Inc. in the critical holiday weeks ahead.

Comparable sales for Walmart stores in the U.S. — a key performance barometer — rose 3.4 per cent in the third quarter, beating analysts’ estimates. The retailer received its biggest boost ever from its online unit, which has attracted more customers thanks to a website redesign, more delivery options and new products from Nike and other top brands.

That’s helped put distance between itself and retailers like J.C. Penney Co., whose sales missed expectations Thursday.

“Our performance was good across the box,” Chief Financial Officer Brett Biggs said in an interview. “We feel good about how the year will finish out.”

Walmart is poised to be a big winner in what is shaping up to be the best Christmas shopping season in recent memory. Walmart’s wide variety of products — from toys to turkeys — and low prices both in stores and online have positioned it to grab new sales as retailers like Toys “R” Us Inc. have faded from the scene. Walmart’s position as the nation’s top grocer has also provided a bulwark against Amazon, which is still figuring out its food strategy more than a year after acquiring Whole Foods Market.

“Walmart will be one of the pace-setters this holiday season,” Moody’s Corp. analyst Charlie O’Shea said in a note.

Walmart shares rose as much as 2 per cent before the start of regular trading in New York, before paring gains. The stock had climbed 2.8 per cent this year through Wednesday’s close, beating the 1 per cent gain in the S&P 500 Index.

Grocery Giant

As its food business goes, so goes Walmart. And it’s been going well lately thanks to price cuts, refurbished produce displays and a rapid rollout of curbside grocery pickup, now available at nearly 2,100 stores. Shoppers like the convenience, and the service has attracted new customers as well as higher average orders.

“Walmart has been exceptional at quickly adapting to the realities of modern retailing,” Neil Saunders, an analyst at GlobalData Retail, said in a note.

Web sales came in ahead of Walmart’s full-year forecast, growing 43 per cent in the U.S. The redesign of a once-clunky site has boosted traffic and Walmart has grown its market share in every major online category, according to GlobalData Retail. Those sales come at a cost to profitability, though, as online orders are more expensive to fulfill. Gross profit margins narrowed once again in the quarter, also weighed down by high transportation costs.

Web Traffic

Looking ahead, Walmart also needs to avoid the supply-chain snafus that its website suffered during last year’s holiday season, which hampered online growth and worried investors.

“There is more work to do here in making Walmart.com the first port of call for shoppers who are very used to defaulting to Amazon,” analyst Saunders said.

The retailer boosted its full-year adjusted earnings per share outlook to US$4.75 to US$4.85 from US$4.65 to US$4.80 earlier. Walmart now sees U.S. same-store sales growing at least 3 per cent this year, better than the previous guidance of “about 3 per cent.”

–With assistance from Karen Lin and Riti Joshi.


Ontario sharpens axe as it readies plan to cut mounting $15-billion deficit

Investors will be watching for hints as how Ontario plans to start tackling the world’s largest largest pile of sub-sovereign debt when the Canadian province gives a snapshot of its finances on Thursday.

Finance Minister Victor Fedeli will unveil the new government’s economic and fiscal outlook in the provincial legislature starting at about 1:15 p.m. While not an official budget, the document will outline the government’s initial assessment of a province that’s growing moderately while steadily racking up debt.

Ontario’s deficit is poised to reach about $15 billion (US$11 billion) in the fiscal year ending March 31, more than double the previous government’s forecast, while net debt stands at about $338 billion, the highest of any sub-sovereign borrower rated by Moody’s Investors Service.

“Given that the new government stands for good management, I would expect them to address the deficit as a priority,” Robert Hogue, senior economist at Royal Bank of Canada, said in a telephone interview. “I would expect a significant reduction of the deficit fairly early in its mandate.”

Premier Doug Ford has committed to balancing the books over time and has already begun to rein in spending, scrapping a pilot basic income program and capping social assistance. Together with other measures, that could save $2 billion this year, according to report from Toronto-Dominion Bank last week. Allowing other programs to lapse could save another $1 billion while freezing a minimum wage hike may support employment and boost revenues, the bank said.

Rising Rates

But the Progressive Conservative government, which swept to power in June, also made some costly campaign pledges which could push the budget shortfall to as high as $18.7 billion in 2019-20, according to TD. Those promises included a cut to corporate and personal income taxes and reduction in the gas tax.

“How this is going to line up with the campaign promise to balance is going to be interesting,” said Joey Mack, Toronto-based director of fixed income at GMP Securities LP. “But given all the announcements pointing to huge deficits, I don’t think we will get too much reaction” if the deficit stays below $18 billion, he said.

Ontario is expected to grow at about 2 per cent this year and 1.9 per cent next year according economists’ forecasts compiled by Bloomberg.

Ontario bonds have declined 1.5 per cent this year, trailing the 1.3 per cent drop for Quebec and 1.1 per cent for the Bank of America/Merrill Lynch bond index of provincial borrowers. Investors in Ontario’s 2.9 per cent bonds due 20128 demand about 67 basis points over similar duration federal Canada debt, according to bid prices in Bloomberg.

While risk premiums aren’t a source of big concern, the absolute yields are rising as the Bank of Canada and other central banks around the world increase interest rates to cool inflationary pressures. Since the end of June, when Ford took office, the yield investors demand to hold province’s debt maturing between three months and five years have increased between 40 and 50 basis points, Bloomberg data show.

“An interest rate increase of 25 basis points will cost Ontario taxpayers an additional $100 million a year in interest payments,” Fedeli wrote in a Nov. 1 opinion column for the Toronto Sun. “For the government of Ontario, interest rate increases pose a significant challenge.”


Tim Hortons launches kids’ menu in push to return to its roots

Tim Hortons launched its first kids’ menu across Canada on Wednesday, an apparent attempt to claw families away from competitors such as McDonalds as the coffee behemoth works to rehabilitate its image.

The new menu of grilled cheese sandwiches, chicken strips and cream-cheese chicken wraps is part of a series of promised food innovations and comes as the brand starts to recuperate after a protracted battle with discontented franchisees.

“It’s a been a fun ride,” Tim Hortons president Alex Macedo said. “Actually, fun is probably the worst word I could use.”

The ongoing saga between the franchisees and Tim Hortons parent Restaurant Brands International Inc. bubbled up again in September, when Tim Hortons locked the leader of the franchisee revolt out of his stores in Alberta, accusing him of breaking an agreement that forbids franchisees from publicly disparaging the brand.

David Hughes, then-president of the Great White North Franchisee Association, denied the allegation. An industry source said the franchisee group continues without Hughes, and still with an active membership.

But this week, Macedo said relationships with franchisees were on the mend, pointing to his series of meetings across Canada and a plan for improving customer experience that he said took input from store owners. Franchisees, he said, will finish the year more profitable than last year.

“We’re trying to go back to our roots and be the brand that everyone feels really good about in Canada,” he said. “When we drop the ball, people feel it.

“We acknowledge that we had our shortcomings in communicating with our franchisees and some of the activations that we did,” he said. “We’re all starting to speak the same language…. We’re not out of the woods by any means. But we’re in a much better place than we were in the beginning of the year, no doubt.”

Macedo’s return to the chain’s roots includes a revamped advertising strategy, which most recently saw the coffee chain fly the sole hockey team in Kenya to Canada to scrimmage with NHLers.

In addition to the kids’ menu — which will start in the U.S. later this month — Tim Hortons has recently unveiled all-day breakfasts and announced the coming of a replacement to its leaky coffee lid. Macedo also signalled plans to “innovate on coffee” but wouldn’t say what changes he hoped to make or new products he hoped to release.

Robert Carter, an industry advisor in food service with NPD group, said in the $60 billion restaurant industry — with flat annual sales growth of around two per cent — moves like adding a kids meal can be seen as an attempt at siphoning customers away from major competitors.

“The challenge for restaurants is, how do you create growth greater than one or two per cent?” Carter said. “Generally it comes down to literally stealing shares from your competitive set.”

“What (Tim Hortons has) done over the last year is really start to identify, ‘Where do we need to be stealing customers to help drive traffic?’ And I think that’s why you’re seeing things like the kids meals.”

But Macedo wouldn’t talk about the competitors, let alone name them. Instead, he said the kids’ menu was something that emerged from listening to customers and franchisees.

“I was trained so much, people can torture me and I don’t say a word of any competitor.”

With files from the Canadian Press

Stelco shares climb more than 10% as CEO downplays tariff impacts

Shares of Stelco Holdings Inc. climbed more than 10 per cent Wednesday in mid-afternoon trading after the company downplayed expected impacts of U.S. tariffs as it shifts focus further into the Canadian market.

The Hamilton, Ont.-based steel producer paid about $39 million in tariffs in the third quarter, but Stelco chief executive Alan Kestenbaum said in an earnings conference that he expects that to drop in the fourth quarter.

“In Q4 we will already see a meaningful drop in tariff costs,” he said.

He said the company will look to shift its current 24 per cent of production exposed to U.S. tariffs closer to zero by selling more into the Canadian market.

Those efforts have been helped by Canada’s retaliatory tariffs on U.S. producers, and Stelco’s investments to expand product offerings and fill voids in the Canadian market created by those retaliations.

The renegotiated North American trade deal could also leave the company better off, said Kestenbaum.

“I believe as a result of the new NAFTA, or USMCA, it is quite possible that the Canadian industrial markets we serve will actually improve its competitiveness and expand, giving us even more demand than just the void left by the retreating supply from the targeted sources.”

The bullish stance of tariff impacts helped push the company’s share price up $1.75, or 9.70 per cent, to close at $19.80 on the Toronto Stock Exchange.

Kestenbaum said the company is also looking to create more value on the real estate side. Stelco bought more than 1,200 hectares of land in June, including nearly 324 hectares in the Toronto-Hamilton area.

“Strategically, we are continuing to advance our efforts to maximize value of our assets,” he said.

“During the third quarter, we advanced in our strategy to see that land developed for its highest and best purpose by starting to hire experts in real estate development, developing a master plan for land development and beginning to market some of our vacant buildings to the very hot Greater Toronto industrial market.”

After market close on Tuesday, the company had reported adjusted earnings of $135 million or $1.52 per share, compared with analyst expectations of $164 million or $1.54 per share according to Thomson Reuters Eikon.

Revenue came in at $619 million, an 84 per cent increase from the $336 million it pulled in for the same quarter last year as volumes shipped surged more than 42 per cent to 586 million tons.

Stelco says higher prices helped offset tariff costs, as its average selling price was $980 per net ton, up from $793 per net ton for the same quarter last year.

Canada’s economic Achilles heel: A mountain of household debt

I bought the Stephen Harper book, and I look forward to reading it. However, I hope his analysis of populist politics is more credible than his assessment of his time in office. The former prime minister’s rearview mirror has some blind spots.

“Under my government, Canada avoided the worst of the crisis and came out of it all the stronger,” Harper writes in the excerpt of Right Here, Right Now that was published in the National Post on Oct. 5. “By any measure, we left the country in good shape.”  

A lot of measures, sure; but not every one.

The ratio of household debt to disposable income was 167 per cent when Harper’s Conservatives lost to Justin Trudeau’s Liberals in the autumn of 2015, compared with 132 per cent at the start of 2006, when Harper began his nine-year run as prime minister.

As has been pointed out often, Americans took on a similar burden ahead of the financial crisis. And now household debt is the economy’s Achilles’ heel. Joblessness is at a level that economists associate with full employment, and exports touched records earlier this year. But all that debt makes Canada vulnerable to a shock; say an economic crisis in China that crushes global demand and sinks commodity prices.

In such a scenario, all those exporters who were loving life this summer would be in trouble. The unemployment rate would rise, investment would plunge, and a wave of defaults likely would follow. It could be bad, which is why the Bank of Canada is raising interest rates so slowly.

High levels of employment and surveys that show companies are struggling to keep up with orders imply upward pressure on the inflation rate, which the central bank is mandated to contain. But policy makers don’t want to be the cause of one of those negative shocks by raising interest rates faster than indebted households can bear. (The Canadian debt binge continued after Harper left office: the ratio peaked at 170 per cent in 2017 and is now around 169 per cent.)

“Debt to income is still really high,” Carolyn Wilkins, the Bank of Canada’s senior deputy governor, told reporters in Ottawa on Wednesday.

Wilkins isn’t exactly media shy, but she tends not to speak in public for the sake of it. Her decision to give a little time to journalists was meant to emphasize that the central bank is doing a lot of work on debt and the threat it presents.

The Bank of Canada this week unveiled its Financial System Hub, an online magazine that will serve as a clearing house for its latest research on the housing market, credit conditions and other matters that influence the stability of the financial system. (The Financial System Review, formerly published twice a year, will now be published only once, in June.) Wilkins said the latest batch of research suggests the threat of a debt-driven bust is receding, but only slowly; Canada’s debt mountain will cast a shadow over monetary policy for a long time.

One of the central bank’s new research papers explains why.

A team of seven staffers ran a series of models to anticipate what would happen if the average Canadian house price plunged by 20 per cent, led by even bigger drops in Toronto and Vancouver. (They stress that they see this hypothetical scenario as “low-probability” event.)

The good news: they found that Canada would avoid an actual financial crisis, in part because the country’s banks have enough cash in storage to weather such a storm. But the damage still would be severe.

Mortgage rates would remain stable, but only because policy makers would be forced to cut the benchmark lending rate to offset a five-percentage-point decline in gross domestic product over two years. Ontario and British Columbia would be hit hardest. Consumption would drop, in part because homeowners suddenly would feel poorer. Some would actually be poorer because they would be without jobs. Companies would find it more difficult to get loans as banks retrenched.

“Losses are not large enough to trigger funding withdrawals or asset fire sales,” the authors conclude. “Still, pro-cyclical behaviour in the financial system could amplify macroeconomic effects, even though financial system resilience is not threatened.”

Some think a housing bust is inevitable. This vocal minority say Stephen Poloz, the Bank of Canada governor, and his predecessor, Mark Carney, left interest rates too low for too long after the worst of the financial crisis had passed. History suggests these critics could be right; the counter from Poloz is that inflation was weak, and that a stronger economy will put households in a better position to pay off their debts.  

But if the Bank of Canada must bear responsibility for the country’s excessive debt burden, so must Harper, who was consistently reluctant to use the government’s regulatory authority to curb Canadians’ hunger for low-interest loans.

A separate research paper released by the central bank shows that stricter lending conditions are making the financial system safer. For example, newly mandated tests of a borrower’s ability to pay if economic conditions worsen prompted a bid drop in new mortgages with loan-to-income ratios in excess of 450 per cent; such high-wire lending represented six per cent of home loans in the second quarter, compared with 20 per cent at the end of 2016.

Harper made balancing the budget his main priority after the Great Recession was over. That decision removed stimulus from an economy that still needed some, forcing the central bank to keep interest rates low. So federal finances were indeed in good shape when Harper left office. Household balance sheets, on the other hand, were in terrible shape and we’re still paying for it.

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