29.04.2019

Canadian Crude has FOMO

The Trump administration pulled the trigger last week and announced it will sanction countries that purchase Iranian oil, beginning May 1.

The reason? Trump has had it out for Iran since taking office, and his plan to punish the country for supporting terror groups and maintaining a nuclear arsenal includes isolating Iran through economic sanctions.

Iran is one of the world’s largest oil producers, so cutting off buyers for their major export is sure to hurt.

The move will squeeze global oil supply even tighter, ultimately raising prices. Already, OPEC Basket Price (the weighted average price for crude from OPEC member countries) has soared to six-month highs.

Trump claims to have secured commitments from Saudi Arabia and the UAE to make up for the cut in supply, but what about Canada?

According to Scotiabank economist Rory Johnston, it’s still too early to tellwhat the precise impact these sanctions will have on Western Canadian Select (the price indicator for Canadian oil).

However, it’s unlikely that this will provide any meaningful benefit to the Canadian oil and gas industry.

For one, Canadian crude is not an exact comparable to Iranian oil in terms of composition and usage. It’s stickier, and requires more diluent and refining.

But most importantly, we’ve still got a major transportation issue. To put it simply; even if other countries wanted to buy our oil, we don’t have any means of getting it to them. Our pipeline capacity is maxed out, as are the rail cars we’ve purchased to move supply.

So basically, this is a bit of a missed opportunity for Canadian oil and gas. We have the third largest oil reserves in the world, but without means to get product to market, we’re left watching from the sidelines.

unnamed
PHEW! Trump’s on it.

Canopy Growth and Acreage Holding Inc.’s Smokin’ Hot Deal  

Just over a week ago, Canopy Growth (Canopy) announced the first major deal between a Canadian cannabis player and a U.S. counterpart, rocking the industry on both sides of the border.

The April 18 announcement was unusually complex and at first many incorrectly presumed that Canopy was buying Acreage Holdings Inc. (Acreage), a cannabis cultivation, processing, and dispensing company based in the U.S.

Canopy isn’t buying Acreage today. It plans to acquire the right (or option) to buy Acreage for US$3.4 billion. Shareholders from both companies will still need to approve the terms of the deal and it will be subject to regulatory and exchange approval.

If these hurdles are overcome, there is still one minor detail standing in Canopy’s way of closing this deal – federal legalization of cannabis in the U.S.

Because cannabis is not legal across the States, public Canadian cannabis companies had been effectively shut out of owning or operating any U.S. assets.

By pursuing this agreement, Canopy is signaling to the market that they expect to see a catalyst that would allow Canadian cannabis companies to legally participate in the US cannabis market. Besides full legalization, this could be done through a piece of legislation that was introduced to congress earlier this month – the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act.

The STATES Act is a promising alternative to full legalization. It would make cannabis ‘federally permissible’ and allow Canadian companies to participate in the U.S. market in specific states where cannabis has been legalized.

Industry experts are divided on whether we can expect to see the STATES Act passed in the U.S. Senate and when, but it’s likely to come before federal legalization. And it better come sooner rather than later. The deal stipulatesthat if cannabis isn’t at least ‘federally permissible’ in the U.S. in the next 7.5 years, it can be terminated.

Canopy’s deal is a game changer for Canadian cannabis companies and effectively establishes a pathway into the world’s biggest cannabis market. While Canopy has the first mover’s advantage, we expect to see other Canadian companies use this template as a way to enter the U.S. as soon as the time is ripe.

unnamed.png


 

Surplus, Deficit, or both? How our National Bank Account is Doing

This week, the Canadian government posted a surprise surplus, but an overall deficit. How can both be true at the same time, and why does it matter?

On Friday, Finance Canada released a “Fiscal Monitor”: a document that highlights the 2019 federal balance sheet by breaking down the 2018/2019 fiscal year, (April 1st to March 31st). Within the first 11 months of this period, the Canadian government ran a $3.1 billion surplus. Surprising news, because last month, the Liberals projected a $14.9 billion shortfall in the 2019 budget.

So where is all this money going towards?  Major expenses include $2.2 billion for infrastructure, $1 billion for energy efficiency improvements, and $900 million towards forgiving and reimbursing loans to Indigenous governments. Furthermore, “public debt charges” (the national debt that the Government of Canada owes) increased by 8.4% ($1.7 billion), due to a higher interest rate on government debt.

In total, there will be a $15 billion deficit as projected for 2018-2019. What has softened this deficit, however, is the higher than expected revenues the government received (up by 8.5%,  $23.5 billion).

This increase was due to higher revenue from taxes, and incoming employment insurance premiums. Employment insurance premiums are a tax used to fund social services. For example, if you make $50,000 a year, your employer will deduct $810 and submit this amount, plus an additional $1,134 to the Canadian Revenue Agency. The CRA uses these premiums to fund EI, which Canadian taxpayers can apply for if they cannot work or are searching for work.

Budget spending and deficits will be key issue in the October federal election. The Liberal government has predicted deficit spending to the tune of $19.8 billion in 2019-2020, $19.7 billion in 2020-2021, and $14.8 billion in 2021-2022.

Trudeau has already received hefty criticism, as his 2015 campaign promised to cap annual deficits at $10 billion and to balance the budget by 2019 (there is currently no updated timetable to do so). Canada’s public debt is now at $761 billion, up from $688 billion when Trudeau took office in 2015, despite his government’s promise to cap the increase to $20 billion.

Here at Btchcoin, we’re looking forward to seeing how the parties will propose to tackle the deficit (or not) in their upcoming election platforms, and we look forward to keeping you in the know.

Leave a Reply