David Olive: Is there a recovery in store for Canada’s oilpatch?

Expect the accelerated pace of M&A activity in the Calgary oilpatch to continue well into next year, as energy companies snap up peers priced at discounted valuations.

Recent weeks have seen four agreed or proposed deals each worth more than $ 1 billion among Calgary-based buyers seeking to increase their industry footprints at a time of distressed selling prices among oilpatch firms, due largely to pipeline-related bottlenecks for heavy oil.

Canadian heavy oil, or Western Canadian Select (WCS), is trading at a remarkable discount to Brent, the benchmark price for more than half the world’s oil, and to West Texas Intermediate (WTI), as well.

At this writing, WCS fetches a mere $ 26 (U.S.) per barrel, while Brent is priced at $ 81 (U.S.). A gap that wide puts further pressure on Ottawa to find the means of proceeding with the Trans Mountain pipeline expansion.

Meanwhile, rail volumes for heavy oil will increase. That should put upward pressure on shares of Canadian National Railway Co. ($ 112 (Cdn.)) and Canadian Pacific Railway Ltd. ($ 206 (Cdn.)).

The benchmark WCS itself is poised to rise, its sharply discounted price having caught the attention of a heavy-oil hungry China. The world’s second-largest economy needs the fuel, of course, but also the bitumen of Athabasca’s output. Bitumen is in short supply relative to soaring Chinese demand in the midst of a renewed Chinese infrastructure building boom that consumes the black residue for road building, roofing materials and countless other construction applications.

China’s access to Venezuela, second-largest heavy oil supplier after Athabasca, has been severely constrained since May due to economic upheaval in that country. Chinese demand for WCS has already jumped almost 50 per cent this year.

Who let the bears out?

A perfect storm is brewing in equities. The sharp price drops of recent days are a sign of worse things to come, or at best an indefinite flat-lining of stock valuations.

The market has long been overvalued, of course. It appears that what market strategists call “capitulation” finally has set in, when investors finally lose confidence in the market’s ability to keep posting record highs despite troubling fundamentals.

The U.S. trade war is expected to trim global economic growth. Add to that growing worries all year about a slump in economic growth and stock valuations in emerging markets.

Brexit is now on the doorstep, set for March, a disruption that takes the shine off Europe’s long anticipated recovery from its worst economic crisis since the Second World War.

Those worrisome developments are playing out against a backdrop of rising interest rates, which threaten to crimp consumer spending and drive up corporate and consumer borrowing costs.

At some point, even the most bullish investor has to worry that these negatives are going to bite into the corporate profits that today’s still lofty stock valuations are based on.

But if we are heading into a bear market, prospects are good that it won’t be as deep or long as many might expect. Prospects for continued U.S. economic strength are good. Europe has almost fully recovered from the Great Recession, though a post-Brexit U.K. has to be counted a wild card.

As noted above, China is launched on another infrastructure building boom. And by and large, corporate debt levels are manageable, business having taken full advantage of robust equity markets as a cheap source of capital, rather loading up on debt.

The Magna man’s mess

What to make of Frank Stronach’s $ 520-million (Cdn) lawsuit against his daughter and those he perceives as her allies in allegedly mismanaging the family fortune and using “covert and unlawful actions … to limit or eliminate Frank’s role in running the Stronach family business”?

Belinda Stronach denies the allegations.

Actually, the lawsuit, one of the biggest in Canadian history, was filed Oct. 1 in the Ontario Superior Court of Justice by Stronach, 86, founder of auto-parts giant Magna International Inc., and his wife, Elfriede. And it names not only daughter Belinda, 52, but her two children, Frank and Nicole, and the CEO of family holding company The Stronach Group (TSG), Alon Ossip.

The veracity of the Stronachs’ allegations obviously remains to be assessed in court in the absence of an out-of-court settlement, the ideal resolution.

It’s interesting to note from Frank and Elfriede’s court filing that TSG controls a staggering 253 family-controlled businesses. Somehow, Warren Buffett’s Berkshire Hathaway Inc., world’s biggest conglomerate, with 2017 revenues of $ 239 billion (U.S.), gets by with just over 300 subsidiary companies.

Those TSG firms, according to the court documents, are engaged in racetrack ownership and real estate, among other activities.

Those would be the same realms in which Frank Stronach himself met with countless disappointments while still at Magna, to Bay Street’s continued annoyance.

If indeed TSG’s finances are in sorry shape, a wise alternative would have been to simply keep most of the money in shares of the company that created the family fortune in the first place, the auto-parts business Stronach founded in 1957. Magna shares have more than tripled in value since Stronach quit the firm’s chairmanship in 2011, for a current total shareholder value of $ 21.1 billion (U.S.).


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