The Globe and Mail - 11.03.2020

B4| REPORTONBUSINESS O THEGLOBEANDMAIL| WEDNESDAY,MARCH11,2020

OPINION&ANALYSIS

DILBERT

A

painful aspect to this oil crash for
Canada’s energy business is that
the wounds from the last one
haven’t fully healed.
If there is a positive, it’s that the lessons
from 2014-16 are still fresh in the minds of
executives and directors. The most impor-
tant: act quickly and decisively.
Cenovus Energy Inc. did just that, an-
nouncing a series of measures late Monday
to deal with crude prices that in one day
tumbled 24 per cent – from cutting spend-
ing by almost a third to putting new oil
sands projects on ice and halting crude
shipments by rail.
Chief executive officer Alex Pourbaix’s
swift response was just what was required
after Cenovus’s stock lost more than half
its value in one horrific session.

After all, there’s no reason to keep cap-

ital tied up expanding and shipping the

company’s oil sands-derived crude output

when the stuff is selling for about half of

what it was at the start of year. It is the last

thing investors need in the midst of an oil

price war. The stock clawed back 11 per cent

on Tuesday, as the market

came away with some relief

that Cenovus would preserve

its resources.

Other companies also

took harsh medicine: Surge

Energy Inc. slashed its divi-

dend by 90 per cent and

pushed the remainder of its

capital spending into the sec-

ond half of the year. In the

United States, Occidental Pet-

roleum Corp. cut its dividend

by 86 per cent and its capital

spending by about US$1.7-

billion. Marathon Oil Corp.

reduced its capital budget by

a fifth.

Others will undoubtedly follow, having

struggled through the ravages of the last

downturn, especially in Canada where the

rout was pronounced. Then, many were

slow to react to shifting tectonic plates in

the oil world.

At the time, Saudi Arabia had aban-

doned its role as the world’s oil price cop,

and refused to limit its own production

when other countries such as the U.S. and

Canada pumped oceans of higher-cost

supply. That set world prices tumbling,

and in subsequent years, concerns about

demand kept a lid on markets.

Many in the oil patch ini-

tially figured markets would

bounce back before too long,

and made minimal reduc-

tions to spending while put-

ting on a brave face and

maintaining dividends. That

put heavy pressure on bal-

ance sheets as debt metrics

worsened along with dwin-

dling cash flows as months

wore on.

Eventually, companies

made severe cuts to oper-

ations and staff, but not be-

fore stock prices tumbled

throughout the sector. In

some ways, the downturn never really

ended in Alberta.

Now, Saudi Arabia and Russia appear to

be digging in for a lengthy skirmish in the

markets, after they failed to agree last week

on output limits to deal with an economic

slowdown. Two of the largest producers

punching it out for market share means a

world of hurt for the rest of the suppliers.

The industry had early indications of

weakness as crude prices fell over worries

about the global economic cost of the cor-

onavirus outbreak, and some companies

had begun to throttle back. Last week, for

instance, Vermilion Energy Inc. cut its

monthly payout by half, citing those risks.

(This did not insulate the shares from the

sell-off, however. They are down more

than 40 per cent from Friday.)

In a letter to investors on Tuesday, Eric

Nuttall, portfolio manager for Ninepoint

Partners, listed the oil prices required for

various energy plays to work: Large oil

sands producers need West Texas Interme-

diate of US$41 to US$46 a barrel to main-

tain dividends and keep production flat;

U.S. shale producers require about US$55 a

barrel; smaller conventional Canadian

producers need US$48 to US$52. WTI set-

tled up US$3.72 at US$34.85 on Tuesday.

“The easiest call in the world to make to-

day is that the current oil price is complete-

ly unsustainable,” Mr. Nuttall wrote. “The

more difficult call is how long the price col-

lapse can go on for.”

Given the magnitude of the drop, and

the likelihood that the path to recovery

will be very bumpy, many companies al-

ready know the drill: cut first, and adjust

later.

Movingquicklyiskeyforenergycompanies

There’snoreasontokeep

capitaltiedupwhencrudeoil

isnowsellingforabouthalfof

whatitwasatthestartofyear

JEFFREY
JONES

OPINION

Saudi Arabia and

Russia appear to be

digging in for a

lengthy skirmish in

the markets, after

they failed to agree

last week on output

limits to deal with

an economic

slowdown.

F

or most of his first 18 months
as Finance Minister, Eric Gi-
rard has toiled out of the
limelight as the Coalition Avenir
Québec government led by Pre-
mier François Legault focused on
key campaign promises such as
cutting immigration and banning
religious symbols among some
public employees.
Now, with a coronavirus-in-
duced downturn facing the global
economy, Mr. Girard’s public pro-
file is about to increase dramat-
ically as he becomes the neophyte
CAQ government’s point-person
for guiding the province through
an economic slowdown.
Tuesday’s provincial budget
should, hence, be viewed as more
of a rough draft for the coming
months. Major adjustments will
be required if the economy takes a
hit from COVID-19 and any de-
cline in consumption that accom-
panies the outbreak. The budget’s
projections for gross domestic
product growth of 2 per cent in
2020 would not materialize if
Quebec sees exports stagnate and
consumers hibernate. Nor would
Mr. Girard’s estimate of a 3-per-
cent increase in Quebec’s “own-
source” revenue to $95.6-billion.
The figure excludes federal trans-
fer payments of more than $25-
billion.
How Quebec’s public finances

stand up during a crisis could

have a profound impact on the

fate of the Legaultgovernment. It

came to office promising sound

fiscal management and robust ec-

onomic growth. But a shrinking

working-age population and low-

er immigration levels were al-

ready hampering its plans before

the threat of a recession emerged.

As a former treasurer at Na-

tional Bank of Canada, Mr. Girard

knows a thing or two about ma-

naging liquidity. He knows a

downturn that results in lower tax

revenue and higher spending

would interfere with his grand

plan to close the wealth gap with

Ontario. And it would test the ve-

ry foundations of Quebec’s new-

found fiscal health.

Quebec has made remarkable

fiscal progress in recent years, go-

ing from provincial laggard to the

front of the class in cleaning up its

public finances. Its net debt-to-

GDP ratio has fallen to 37.3 per

cent from more than 50 per cent

only five years ago.

Budget surpluses totalling

more than $14-billion that accu-

mulated under the former Liberal

government and during the

CAQ’s first year in office could

evaporate as the province tackles

a downturn, sending the debt-to-

GDP ratio higher again.

Under the provincial budget

law, the past surpluses are nomi-

nally held in a “stabilization

fund” that Mr. Girard could draw

on to reduce the deficit during a

recession. The fund, however, ex-

ists only for accounting purposes,

since past surpluses have been

applied to pay down debt.

Hence, it would not take much

for Quebec to return to the bad

old days when it borrowed to pay

for the groceries. Over the past

five years, the province has de-

pended on steadily increasing

federal transfer payments to stay

in the black.

Indeed, Quebec’s accumulated

budget surpluses have remained

far inferior to the more than $50-

billion the province has received

in equalization payments over

the past five years. And, as the Par-

liamentary Budget Officer said in

a Feb. 27 report, the sustainability

of Quebec’s public finances re-

mains conditional on a steady in-

crease in federal transfer pay-

ments in coming years.

In 2019-20 alone, overall feder-

al cash transfers jumped 8.6 per

cent to $25.1-billion, including

$13.1-billion in equalization. Tues-

day’s budget forecasts $25.6-bil-

lion in federal transfers, an in-

crease of only 2.4 per cent, with

equalization growing by only 1

per cent to $13.25-billion.

Mr. Legault has made reducing

Quebec’s dependence on equali-

zation payments a key long-term

goal. As a result, Mr. Girard has

spent much of the past year craft-

ing a plan to shrink his province’s

economic gap with Ontario. The

plan, which the Finance Minister

first described in his November

update, involves outpacing Onta-

rio in productivity growth, boost-

ing education levels and encou-

raging Quebeckers over 60 to re-

main in the work force by offering

a tax credit of up to $1,650.

Quebec’s employment rate

among those 15 to 59 has maxed

out. By cutting immigration lev-

els, the province faces severe la-

bour shortages in some sectors.

Hence, Quebec’s rosy unemploy-

ment rate of 4.5 per cent in Febru-

ary obscures deeper labour mar-

ket challenges that have become

obstacles to economic growth.

Mr. Girard has been counting

on massive automation by busi-

nesses to ease the labour crunch.

The budget projects an increase of

3.6 per cent in business spending

on plants and machinery in 2020.

A recession, however, would like-

ly lead to a decline in business in-

vestment. Tuesday’s budget in-

cludes $1-billion over five years

for measures “to improve the pro-

ductivity and competitiveness” of

Quebec businesses, but only $107-

million of that sum is slated to be

spent in 2020-21.

On Tuesday, Mr. Girard chose to

strike an optimistic tone despite

the proliferation of negative eco-

nomic signals globally. But his

budget’s best-before date may al-

ready have passed before he even

tabled it.

QuebecFinanceMinisterEricGirard,left,bumpselbowswithTreasuryBoardPresidentChristianDubébeforedeliveringhisbudgetspeechonTuesdayattheNationalAssembly.
Thebudgetmayneedmajoradjustmentsiftheprovincialeconomytakesahitfromthecoronavirusoutbreak.JACQUES BOISSINOT/THE CANADIAN PRESS

Quebecbudgetmaybealreadypastitsbest-beforedate

KONRAD
YAKABUSKI

OPINION