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No, the sky isn't falling: Why there are glimmers of hope on the horizon

No, the sky isn't falling: Why there are glimmers of hope on the horizon

Low oil prices, a weak economy and gloomy economic forecasts got you down? Anyone who has lived through the downturn of the 1980s and even the 1990s knows that things aren't nearly as bad as they were in those days. Unemployment in Canada reached 14% in the early 80s and rates on a 5-year fixed mortgage topped out at 22% (yes, you read that correctly). Millions of people defaulted and just walked away from their homes. Those were dark days indeed, nowhere near the state of the economy today.

The media has a tendency to exaggerate the negatives and makes it difficult to see the light at the end of this dark tunnel. We're bucking the trend this month and giving you 10 reasons why this might actually be a great year in Alberta's energy patch (okay, maybe not "great" but let's say less bad than last year):

REASON #1. $50 oil will feel like it's raining money

As with everything in life, it's all relative. Last year's $60 oil was disheartening after having peaked at $110. But oil producers will be downright euphoric once we get back to $50. And by all accounts, most forecasters are calling for $50 oil by year-end after likely bottoming sometime in the first half. We may not be ready to call a bottom in oil prices just yet but we're getting pretty darned close. If you can stick it out for the next 6 months, things will likely get better from there.

 
 

REASON #2. The Paris climate talks are behind us

Last year's UN Climate Change Conference was one of the most overhyped events in recent history. Canada sent almost 400 delegates to Paris in an effort to get off the global warming "naughty" list, pledging billions in taxpayer dollars to reduce emissions at home and around the globe. 

However, with exception of perhaps President Obama and Leonardo DiCaprio, the world actually doesn't see Canada as having a poor environmental record. In fact, if you've ever travelled overseas, Canada very rarely gets any negative press (actually, it hardly gets any press at all). Our "poor" environmental record was nothing more than a marketing strategy fabricated by political party pundits. The rest of the world actually sees Canada as a model for freedom and democracy and we never had anything to apologize for. So now that the Paris talks are behind us, our politicians can finally stop the trash-talk and get back to the less-glamourous task of fixing the economy.

REASON #3. Both federal and provincial parties have majority governments

Although not everyone is happy with the parties in power, everyone should be ecstatic that there are no elections on the horizon for at least the next 3 years. Alberta's accidental NDP government and a majority Liberal government in Ottawa was not something anyone expected. But voters need to remember that government policies are only in place while the government is in power. Before getting too excited about emission caps, royalty rates, higher income taxes and rising electricity costs, remember that everything is up for renegotiation in 3 years time. That's the beauty of living in a democracy.

REASON #4. Alberta now has a carbon-pricing strategy with "unanimous" approval

Love it or hate it, Alberta's carbon plan was developed in conjunction with aboriginal groups, environmental lobbyists and Canada's largest oil companies. All parties involved declared victory in the fight against global warming. This was admittedly a smart move on the part of the NDP government, making it difficult for left wing fringe organizations to complain about not being consulted.

But the good news for Albertans is that the province's carbon revenues will stay in Alberta. If the province had done nothing, there was a big risk the federal Liberals would have imposed something, and likely transfer those carbon dollars to more voter-heavy regions in eastern Canada. So finalizing the carbon pricing plan is something to be very happy about. At the very least, we can all stop talking about it for now.

And that brings us to item 5 . . . . 

 
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REASON #5. The Alberta government will have an estimated $6 billion in funds to "redistribute"

The provincial government expects to raise $6 billion once the carbon pricing program is fully implemented in a few years (assuming the economy doesn't completely fall apart before then). And that's no small peanuts. Yes, a lot of it will come from the taxpayers (which is bad) but hopefully much of it will go back into Alberta's economy (which is good). Expect some portion of those funds to get funnelled back to universities, corporate R&D departments and the thousands of small businesses in Alberta that help support the energy sector. Don't forget that some of the world's largest oil companies are also some the biggest investors in alternative and renewable energy. Billions in tax dollars will likely go back to those same energy companies, which will help cushion the added carbon levy. That may suck if you're a taxpayer or power consumer, but getting this finalized is definitely a green shoot for the energy sector. Innovation is always a good thing. 

REASON #6. Alberta's oil sands are very long life assets with declining operating costs

The depletion rate in the oil sands is about 4% a year, which means every project has a potential life span of 40+ years. That's a huge contrast to the 20% depletion rates for conventional oil and up to 40% for tight shale oil in the US. That makes the oil sands very attractive, long-term assets with virtually no exploration risk. Many oil sands producers, particularly in-situ players, are bringing costs down to the $30 a barrel range, making the oil sands cost competitive with US shale. Factor in a low Canadian dollar and Alberta's oil sands remains a great asset with huge upside potential once oil prices recover. 

 
 

REASON #7. Sometime this year, you'll get that once-in-a-decade opportunity to buy really great companies at a really good price

Ever find yourself looking back on 2009 and thinking "I should have picked up some cheap stocks back then . . . what was I thinking?". Well, you were probably sucked up by all the gloom and doom in the media and fearing the world would end, which obviously didn't happen. Stock markets tend to undergo a huge "rebalancing" every 8 years, and 2016 is very likely going to be one of those years. 

Much of the damage inflicted on energy stocks is already behind us. Although oil prices are no better, most companies are financially more robust, having already drastically cut spending and capital programs. That should translate into improved earnings in 2016. Although it feels better to buy on the highs, the big money is made when picking up those beaten down but well managed stocks. Some of these oversold oil producers can easily double by year end.

Note that some stocks will go to zero, obviously, so be sure to trade carefully :)

REASON #8. Low oil prices will force Canada's economy to diversify

Governments were far too reliant on high oil prices to support Canada's economy, especially the federal government. According to Natural Resources Canada, our energy sector accounts for 1/3 of all exports and almost 1,000,000 direct and indirect jobs across the country. That's way too high for a volatile sector subject to global commodity cycles.

Strong commodity prices translated into bigger west-to-east transfer payments and fattened federal coffers. There was little incentive to develop other industries or even support pipeline construction. Less money being generated from the oil patch might just be the kick in the pants needed to strengthen other sectors of Canada's economy.

REASON #9. Due to the law of averages, Ontario is no longer a have-not province

You're welcome!

REASON #10. As bad as Alberta is, it's still the best province in Canada

Anyone from Quebec or Ontario is likely completely unfazed by the new NDP government. Governments spending money like drunken sailors, adding layers of red tape and raising taxes while thousands hit the unemployment lines is nothing new in this country. But this is a new concept for Albertans and will take some time to get used to. However, it's nowhere near as bad as it is elsewhere in Canada. The job market is still relatively strong in Alberta. Although BC and Ontario are creating a greater number of jobs, most are lower paying and part-time. Alberta has a much higher proportion of good quality, high-paying jobs. Taxes are still the lowest in this province - including corporate, sales, gas and even capital gains taxes. And government debt is still relatively low. At least for now.

So don't give up on 2016 just yet. Better times are probably just around the corner.

Nexen suspends operation at Long Lake

Nexen suspends operation at Long Lake

Why all commodities are headed lower

Why all commodities are headed lower

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