The Globe and Mail - 21.10.2019

B2| REPORTONBUSINESS OTHEGLOBEANDMAIL | MONDAY,OCTOBER21,2019

Projections of a sharp slowdown
in U.S. shale production in the
next couple years could bode well
for demand for Canadian oil, but
the sector still must contend with
stalled pipelines and a transpor-
tation capacity crunch.
According to some analysts, an
abrupt slowing in shale output
south of the 49th parallel over the
next year or so is looking increas-
ingly likely. The United States’
loosening grip on the shale mar-
ket is being attributed to tighter
financial restrictions on new pro-
jects, stalling productivity gains
and a decline in profitable wells.
A recent global oil report by
Goldman Sachs argued that pro-
duction outside the group’s
countries is set to stop growing
around 2021. That could be wel-
come news for countries that are
showing some production
growth in coming years, such as
Canada.
Jackie Forrest, a research direc-
tor with ARC Energy Research In-
stitute in Calgary, called the pro-
jection “interesting,” but urged
caution, saying it will depend on
the overall oil demand growth,
which could be modest, particu-
larly if a recession hits.
If shale does indeed slip the
way Goldman Sachs predicts, it
expects the Gulf States to pick up
the supply slack thanks to a prob-
able production decline from
deepwater OPEC members such
as Nigeria and Angola and little
chance of Venezuela coming back
online any time soon.
It also eyed Guyana as a poten-
tial bright spot in the supply mar-
ket, owing to a combination of re-
cent discoveries and the coun-
try’s exploration incentives com-

bining for “highly economic” oil

production.

For Canada, the report painted

a mixed picture.

On one hand, it predicted that

a cache of planned smaller pro-

jects aimed at easing supply bot-

tlenecks here will increase pro-

duction by up to around 100,000

or 200,000 barrels a day to 2025.

In Alberta, for example,

Rangeland Midstream last week

started construction of its Marten

Hills pipeline system. Expected to

come online in 2020, it will bring

crude and condensate to Edmon-

ton refineries.

Yet, supply route headaches

from the Athabasca region con-

tinue.

Because of those transporta-

tion woes, said GMP FirstEnergy

analyst Michael Dunn, “it’s not

like Canada can jump in and

supply it” if U.S. shale does

wane.

With production capacity out-

stripping export ability, Goldman

Sachs was blunt in its assess-

ment: “Further material growth

is likely to be dependent on new

pipeline capacity.”

Monday’s federal election has

further compounded market un-

ease in the energy sector.

Mr. Dunn is not expecting any

major progress on much-needed

pipelines over the next couple of

years, no matter which party

lands ingovernment.

For investors, the Trans Moun-

tain expansion (TMX) in partic-

ular has turned out to be some-

thing of a “boy who cried pipe-

lines” scenario, as the project’s

development has been repeated-

ly delayed by legal challenges and

regulatory requirements.

“After several years of being

fooled by this – they’ve been

fooled once, twice, three times –

they’re not willing to be fooled

again,” Mr. Dunn said.

Federal Conservative Leader

Andrew Scheer has said he would

declare pipeline construction in

the national interest, which he ar-

gues will get the Trans Mountain

expansion and others built faster.

The Liberals also back Trans

Mountain – Justin Trudeau’s gov-

ernment bought it on behalf of

taxpayers for $4.5-billion – and

other pipeline developments.

But the possibility of a minor-

ity government throws another

wrench in the works. NDP Leader

Jagmeet Singh is opposed to TMX

and has promised provinces the

power to veto pipeline projects

running through their jurisdic-

tion.

“If the Liberals do indeed want

to get the pipeline completed,

what leverage would the NDP

have over them? Will there be a

‘you scratch my back and I’ll

scratch yours’ arrangement? That

remains to be seen,” Mr. Dunn

said.

U.S.shaleslumpmayspurdemandforCanadianoil

Analystsseeprojected

slowdownasboonfor

oilsands,butlingering

transportationissues

couldthwartpotential

EMMAGRANEY

GMPFirstEnergyanalystMichaelDunnsaystherepeateddelaysandregulatoryrequirementsinvolvedwiththeTransMountainexpansion–

pipesforwhichareseenstockpiledinKamloops,B.C.,inJune–havespookedinvestorsinCanada’senergysector.DENNISOWEN/REUTERS

The European Union needs
looser budgetary policies and an
overhaul of its fiscal rule book,
the bloc’s designated economics
commissioner said in an article
published on Sunday.
Writing in Italian financial
daily Il Sole 24 Ore, Paolo Genti-
loni said that while the EU’s
deficit and debt rules must not
be ignored, they needed to be
“reviewed and updated.”
“It’s time for countries which
have fiscal space to use it, in an
overall context of less restrictive
budgetary policies,” Mr. Gentilo-
ni, due to replace Pierre Moscov-
ici as economic and financial
affairs commissioner on Nov. 1,
said.
The former Italian prime
minister warned that with the
EU economy slowing, “the risks
of a prolonged period of low
growth must not be overlooked”
and the task of stimulating the
economy “cannot be left to
monetary policy alone.”
Mr. Gentiloni will have an
important role in scrutinizing

Italy’s draft 2020 budget, which

was submitted to the commis-

sion last week. The budget plan

raises next year’s structural

deficit – which excludes the

effect of GDP growth fluctu-

ations – by 0.1 per cent of gross

domestic product, reversing a

previous commitment by Rome

to lower it by 0.6 per cent.

EU Commission vice-presi-

dent Valdis Dombrovskis said on

Friday that Brussels would ask

Italy for “clarifications” over its

budget intentions.

However, even though the

budget seems to flout EU rules,

many analysts expect the com-

mission to take a lenient ap-

proach and avoid a prolonged

dispute with Rome.

Mr. Gentiloni, who comes

from the pro-Europe Democratic

Party, whichnow governs with

the anti-establishment 5-Star

Movement, said it was crucial

that the budget plan comes

from a government that has a

constructive approach towards

the EU.REUTERS

EU’SINCOMINGECONOMYCHIEFCALLS
FORLESS-RESTRICTIVEBUDGETPOLICIES

W

ith Canadian stocks having their

strongest year in a decade, a pivotal

earnings season will put those

gains to the test in the weeks ahead.

The torrent of third-quarter financial results

gets started this week, and the expectations go-

ing in are low.

Over the past year, profit forecasts for the

Canadian market have declined relentlessly in

the face of weakening global growth, the U.S.-

China trade war, a slowdown in manufacturing,

low oil prices and a soft patch in the domestic

housing market in some areas.

Canadian earnings, as a result, are “running

out of steam,” Hugo Ste-Marie, a strategist at

Scotia Capital, said in a report.

For companies in the S&P/TSX Composite

Index, overall earnings per share (EPS) is ex-

pected to decline by 3.7 per cent from the same

quarter last year, according to Refinitiv data.

But there are more favourable conditions on

the horizon, as this year’s pressures on the cor-

porate sector are expected to give way to an

earnings recovery next year.

“The focus will soon turn to 2020,” Mr. Ste-

Marie said. “We expect TSX EPS growth to reac-

celerate as ... monetary easing engineers a mac-

ro-recovery.”

Global central bankers have shifted into

stimulus mode in recent months as the eco-

nomic fallout from the trade war has spread.

The clearest casualty of the competing tariffs

between the United States and China has been

the manufacturing sector.

In October, the JPMorgan Global Manufac-

turing PMI came in below 50 for the fifth consec-

utive month, the longest stretch of falling out-

put in seven years.

The threat of a factory slowdown sparking a

broader global recession has fuelled rate cuts

around the world, with nearly 60 per cent of

global central banks lowering policy rates in the

third quarter – the highest share since the after-

math of the 2008 global financial crisis, accord-

ing to UBS.

That’s one big reason equity markets have

generally been resilient this year, even as earn-

ings estimates have plummeted, said Shane

Obata, a portfolio manager at Middlefield Cap-

ital.

The S&P/TSX Composite Index is up by 14.3

per cent year to date – the best performance

over that specific time period since 2009 – while

the S&P 500 index has risen by 19.1 per cent.

“Are investors complacent, or are they get-

ting more comfortable with the risks in the mar-

ket? I tend to think it’s the latter,” Mr. Obata said.

After all, Canadian and U.S. job markets re-

main strong, the U.S. consumer is still in good

shape, and signs of a global recession have yet to

emerge.

In the corporate sector, the pain has been

largely contained, as well, said Brian Belski,

chief investment strategist at BMO Nesbitt

Burns.

“Potential earnings weakness is still largely

localized to trade-centric areas,” Mr. Belski said

in a note, pointing specifically to the industrials

sector and Canadian auto parts companies.

Barring a significant deterioration in overall

global economic conditions, the market is set-

ting up for a rebound in profits, Mr. Obata at

Middlefield said.

“Assuming we don’t go into a recession, this

is probably the low point for earnings growth.”

Here are some of the key Canadian sectors to

watch through earnings season:

ENERGY

The upward spike in global crude prices, result-

ing from the attack on the world’s largest oil

processing facility in Saudi Arabia, proved to be

short-lived.

Oil price averages actually declined in the

third quarter from the previous quarter, setting

the Canadian energy sector up for another

tough reporting season.

“Given we are living in a curtailed world, the

opportunity for upward surprises is relatively

low,” CIBC World Markets analyst Jon Morrison

wrote, referring to Alberta’s mandatory oil pro-

duction cuts.

In that kind of environment, energy investors

will continue to prioritize free cash-flow gener-

ation and returning money to shareholders.

FINANCIALS

The big banks operate on a different fiscal year

than most of Corporate Canada, and won’t re-

port for another six weeks or so.

But given their weight within the index, the

banks can make or break Canadian earnings

season. And they may be set up to beat expecta-

tions when they do report, Mr. Ste-Marie at Sco-

tia Capital said. “Consensus appears a tad con-

servative following the release of the latest

housing data.”

A rise in national real estate volumes should

help improve loan originations, he said.

MATERIALS

The fortunes of this sector this earnings season

are likely to be split between gold miners and

the rest.

While gold reached its highest price in more

than six years in the quarter, low commodity

prices continue to weigh on the base metal,

lumber and chemicals subsectors.

INDUSTRIALS

The railways are feeling the effects of the trade

war and manufacturing slowdown, with overall

volumes declining in the third quarter.

Investors will be keen for guidance from

management about the potential for a rebound

in freight volumes in the coming months.

“The key will be whether a number of non-

cyclical commodities can bounce back,” CIBC

analyst Kevin Chiang wrote, citing Canadian

grain, crude oil and potash as focal points.

Crucialearningsseasonwillput

Canadianstockgainstothetest

TIMSHUFELT

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DIVIDENDS

Dividends

Notice is hereby given that the following dividends have been declared.

Issuer Issue RecordDate PayableDate Rate

Ag Growth Common October 31, 2019 November 15, 2019 $0.20

International Inc.

Alaris Royalty Corp. Common October 31, 2019 November 15, 2019 $0.1375

ARC Resources Ltd. Common October 31, 2019 November 15, 2019 $0.05

Automotive Finco Corp. Common October 31, 2019 November 29, 2019 $0.0171

Cardinal Energy Ltd. Common October 31, 2019 November 15, 2019 $0.015

Freehold Royalties Ltd. Common October 31, 2019 November 15, 2019 $0.0525

Kinder Morgan Canada Restricted October 31, 2019 November 15, 2019 $0.162 5

Limited Voting Shares

Kinder Morgan Canada Preferred October 31, 2019 November 15, 2019 $0.3281 25

Limited Series 1

Kinder Morgan Canada Preferred October 31, 2019 November 15, 2019 $0.3250

Limited Series 3

Northland Power Inc. Common October 31, 2019 November 15, 2019 $0.10

Peyto Exploration & Common October 31, 2019 November 15, 2019 $0.02

Development Corp.

Surge Energy Inc. Common October 31, 2019 November 15, 2019 $0.008333

Vermillion Energy Inc. Common October 31, 2019 November 15, 2019 $0.23

Vitreous Glass Inc. Common November 1, 2019 November 15, 2019 $0.03

Whitecap Resources Inc. Common October 31, 2019 November 15, 2019 $0.0285

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