David Olive: Oilpatch in turmoil over forced production cuts
There were mixed reviews when Alberta demanded in December that its oil producers sharply reduce consumption to ease a supply glut and boost prices.
There were complaints in many quarters that Premier Rachel Notley was departing from free-market principles in telling the oilpatch how much it can produce.
Those concerns have since escalated to outrage, notably from the CEOs of oilpatch titans Suncor Energy Inc. and Imperial Oil Ltd. Suncor has been ramping up its production capacity over the past two years. And Imperial, in its anger over the production cuts, is threatening to cancel its planned $2.6-billion Aspen oilsands project.
Meanwhile, U.S. President Donald Trump’s Jan. 28 embargo on imported Venezuelan heavy oil has seen demand soar for Athabasca oil to replace it.
Many U.S. Gulf Coast refineries can only take heavy oil. But supply constraints mean there’s been little relief from the Great White North.
So, watch for pressure from Trump and certain U.S. federal lawmakers on Nebraska to reach a compromise allowing completion of the controversial Keystone XL pipeline.
Meanwhile, the Big Four U.S. railroads are scrambling to increase their oil-tanker capacity. Stock in CN and CP have gained on their increased oil-transport revenue. Now, stock in leading U.S. railroads Union Pacific, Norfolk Western and CSX are poised to do the same. (BNSF is privately owned by Warren Buffett.)
Notley appears to have miscalculated, failing to grasp that companies with enormous fixed assets are compelled to run them at full capacity, or something approaching it, even when prices are weak. They’ll accept diminished prices, and cash flow, rather than go without revenue to cover those fixed costs.
Bombardier’s friendly-skies bid
Bombardier is trying to pull off a textbook case of milking an aging cash cow. The Montreal firm is revamping its 27-year-old CRJ family in a bid to boost sales, create a new market, and lower production costs of the vintage jetliner.
To start, Bombardier has reconfigured its CRJ700 as a smaller, 50-seat plane with three service classes, more legroom and on-board carry-on storage, and a self-serve snack bar.
This is hugely appealing to the likes of United Continental (UC), revealed last week as the launch airline for the cosmetically new CRJ550. UC can profitably fly the plane on lightly travelled routes – it just unveiled a Chicago-Bentonville, Ark. run to serve suppliers of Bentonville-based Walmart Inc. And UC can exploit a new market of quasi-luxury commuter runs among mid-size destinations.
The hope for Bombardier is that other carriers follow UC in adopting the CRJ550 for its low operating costs and lucrative fares.
If the bet pays off, it will be one for the B-school case studies.
The basic design of the CRJ hasn’t changed since the first one entered service in 1992. Bombardier blundered in ignoring the CRJ family as it focused on its ill-fated flagship C-Series, managing to transform one of the most exciting planes of the 1990s into a CRJ family that was forgotten but not gone.
The CRJ is what remains of Bombardier’s aircraft business, after the sale of the C-Series (now the Airbus A220) and its turboprop operation. Don’t count on Bombardier clinging to the CRJ no matter its renewed vitality. The firm has signaled that it is exploring “strategic options” for the CRJ family, which usually is code for dressing up an asset for sale.
Banking shock Down Under
Canada’s banking system perhaps most closely resembles that of Australia. So, looming fines, C-suite upheaval, and a punishing regulatory crackdown on financial services firms Down Under look ominous from a Canadian perspective.
Australian banking is dominated by a Big Four group, as the Canadian financial services sector is effectively run by this country’s Big Five banks.
Each country’s banking sectors had a “good” Great Recession. Neither imbibed in the vast quantities of subprime mortgages and collateralized debt obligations that triggered the Wall Street meltdown of 2008, and the resulting severe recession in the U.S. and Europe.
But an Aussie royal commission just tabled a report with 76 recommendations after a year of investigating suspected improper behaviour by Australia’s financial-services industry. The inquiry uncovered rampant theft, deception and abuse of customers.
A Labour Party likely to come to power in the next election has vowed to implement the 76 recommendations. So, come May, with a new government in Canberra, watch for high-profile firings at the Big Four, mutual fund vendors and mortgage brokers; large fines imposed on the most familiar names in Australian finance; and more than a few miscreants put behind bars – a step no G-7 economy took a decade ago, despite the damage wrought and the state bailouts required.
A message for Canadian observers is that the Aussie system looked safe and honest, as Canada’s does now, until a royal commission looked under the carpet and found vermin in abundance.
Abusive practices surface often enough in Canada to suggest that an Aussie-style royal commission would reveal shocking practices here, though perhaps not sufficient to wipe out the $47.1 billion (U.S.) in stock value that investors in Australia’s Big Four have lost.
David Olive is a business columnist based in Toronto. Follow him on Twitter: @TheGrtRecession