What a difference a week can make.
Canada has been in a rut with enticing companies and investors to see the country as a good place to do business. Investment began to fall four years ago and pessimism grew further when Donald Trump began putting up trade walls around the United States. Declining investment has put a strain on the Toronto Stock Exchange and the loonie.
Critics have been vocal, but the last seven days could well prove significant in starting to shift the view of Canada, from inside and outside the country’s borders. There are finally some reasons for optimism.
First came the USMCA — the new NAFTA — a trade deal with the U.S. and Mexico. The cloud of uncertainty hanging over Canada as negotiations dragged on vanished.
A string of deals
Then came a string of deals in the energy sector, most notable of which was the Royal Dutch Shell-led consortium LNG Canada moving ahead with a $40-billion natural gas export facility on B.C’s coast. For a country starved of big-ticket corporate spending, take note — this is the single largest private investment in Canada’s industry.
It may be just a coincidence, but it’s also noteworthy the deal is in the oilpatch, which has given the federal government the harshest tongue lashing for scaring away investment.
Two other energy companies also made headlines with Husky announcing a hostile takeover attempt of oilsands producer MEG Energy for $6.4 billion, and to the end week, Precision Drilling offering to buy up another Calgary-based oil and gas service company, Trinidad Drilling for about $1 billion.
All of this in just one week.
“This is a perfect storm in favour of Canada. We’ve had a number of factors helping to lift spirits in Canada and about Canada in the international investment community,” said Karl Schamotta, a currency strategist at Cambridge Global Payments. “To some extent, Canadian companies have been beat up and undervalued on international exchanges and so it’s spurring investors to look where value can be found.”
On global currency tables, Schamotta says the loonie is now outperforming other currencies, despite low oil prices in Alberta, which traditionally would pull down the value of the dollar.
The activity this week in the oilpatch, in particular, will almost certainly have caught the attention of investors. Companies like Husky are still attracted to growing their oilsands portfolios, while the LNG Canada project is the first time in five years a company has announced construction of a greenfield mega-project of this kind around the world.
The announcements swim against the tide of comments by critics who have called Canada a bad place to invest.
“It’s an extraordinarily positive development. The vote of confidence Shell is putting behind the economy and Husky as well — that’s going to support investor appetite,” said Schamotta.
Is this just a blip?
The question now is whether this signals a shift in momentum, or is it merely a blip of cheer. Sceptics say issues like the country’s high household debt levels persist, while others say the economic boost from the USMCA pact will be limited.
“The trade deal is unlikely to do very much to raise Canadian growth prospects. However, without a deal, Canada’s economy would grow noticeably slower,” wrote James Marple, senior economist with TD Bank, in a research note on Friday.
Other outstanding concerns about the regulatory process for constructing major projects are also unsettled.
Investing in the ‘patch
Oilpatch investment has driven the Canadian economy for much of the last few decades, until the price crash in late-2014. Since then, companies have continuously pulled back on spending. The booming growth in the oilsands is over.
The country’s economic prospects soured further when Trump became the U.S. president with threats to tear up NAFTA and restrict access to the American market. Consider Trump’s tax changes and regulatory overhaul and no wonder international investors were lukewarm about putting their money in Canada.
See Chrystia Freeland discuss the road to USMCA:
Earlier this year, Statistics Canada released data showing direct investment into the country was $33.8 billion, the lowest level since 2010 and well short of the record high of $126.1 billion back in 2007.
The complaining in the oilpatch has grown louder in recent months especially after continued delays to construction of the Trans Mountain expansion oil export pipeline, which was nearing construction before a federal court effectively tore up the pipeline’s permit at the end of August. The federal government, which now owns the project, is still vowing to build the pipeline.
The LNG industry has had its fair share of failures over the years as more than a dozen facilities were proposed in B.C. But one after another they were delayed or cancelled. The trend stopped with LNG Canada officially approving its natural gas export facility.
“It paints the view that Canada can still get some things done despite some of the issues on the oil pipelines. People are willing to invest here,” said Martin King, a commodities analyst with Calgary-based GMP FirstEnergy.
Now that one LNG facility will soon be under construction, King says that makes it easier for others to follow.
“Maybe this is the thing that opens the door and gets more people coming in and looking at Canada,” he said.
Will the optimism endure?
This past week will provide an initial boost of optimism, but some wonder whether it will stick around.
For one, investors will want to see how Bill C-69 unfolds in Ottawa. It is the proposed legislation that’s set to overhaul the regulatory system that reviews major construction projects before approval.
The government says the bill is designed to shorten the regulatory process and include consultation with more stakeholders, but critics say it could add more uncertainty for companies looking to make sizeable investments. It’s casting a “long shadow” on the oil and gas sector, in particular, according to King, but many other industries too.
“This is not just pipelines — this is mining projects, hydro lines, all kinds of stuff,” he said. “In our view, it’s largely designed to prevent infrastructure from actually being constructed.”
For now, the mood among investors appears to be up. In seven days, the NAFTA renegotiation stalemate was resolved and a few blockbuster announcements were made in the energy sector. Individually they are noteworthy, but in totality, they could signal the start of a shift away from the ‘sell Canada’ narrative.