Is Canada a short?

In previous blog posts, I've discussed my bearish stance on the Canadian economy as expressed through ( EWC, FXC ) due to the collapse in global oil prices. My original hypothesis was Canada is a resource/energy based economy and declining oil prices would make the 'expensive' oil produced in the oil sands less attractive economically from a producer/investment standpoint. Let's explore that thesis a little more and see if it's validated by facts.   

Alberta, Canada contains the 'oil sands' deposits and had an estimated contribution of ~18% to Canadian GDP in 2013 - via wikipedia

According to, energy is ~23% of Alberta's GDP, and the ancillary sector of construction is ~11%. Back of the envelope calculations tell us that ~34% of Alberta's 18% Canadian GDP contribution is energy related. In other words ~6% of Canadian GDP is exposed to Alberta's energy sector.  

$1 per barrel drop in the price of Alberta's oil over 12 months = $215 million less in revenue -

In October of 2014 Bloomberg news reported that Alberta's budget forecast was based on oil prices at $97 a barrel. As of this writing the spot price of WTI crude is $51! That's a $46 gap, or ~47% drop. If crude averages ~$50 a barrel over 12 months that's an estimated ~$9.9B drop in provincial revenues. That will certainly blow holes in budgets and earnings expectations across the board. 

According to a RBC March 2014 provincial economic outlook Alberta was forecast to post the largest real GDP gains of any province for 2014 and 2015. I think that forecast will have to be altered drastically if it hasn't already. As of October 2014, BMO has already slashed Alberta's growth forecast to 2.9% from 3.3%. This might be revised further as the oil drop continues. 

How important is Alberta to Canada's economy? reports:

Alberta contributed one-third of Canada’s economic growth last year, and is by far the fastest-growing province in the country again this year. Since the beginning of 2013, nearly half the jobs created in the country were in Alberta.

Civeo Corp. ( CVEO ) lost 53% of it's value on Dec. 29 after announcing a suspension of its dividend and closing sites -

Why should you care? 

Civeo Corporation provides workforce accommodations in the Canadian oil sands and the Australian natural resource regions. The company offers solutions for housing of workers with its long-term and temporary accommodations; and provides catering, facility management, water systems, and logistics services.

( CVEO ) is on the front lines of Canadian oil sands production and announced it would cut staff in Canada by 30% and in the US by 45%. CapEX will drop ~78%! This is telling me that the fallout from the collapsing oil prices has only begun as capital budgets get cut across the board. 

Several oil majors have already cut or suspended major oil sands projects. Reportedly there is a tendency towards significant cost overruns for large scale oil sands production projects, that when paired with declining oil prices, make projects economically impractical. 

The Joslyn oil sands mine has been shelved indefinitely, a result of rising industry costs that made the $11-billion project financially untenable.
CALGARY – Royal Dutch Shell PLC told regulators it is halting work on its Pierre River mine in northern Alberta’s oil sands and that it has no idea when it may revive the blueprints
CALGARY — Statoil has put its Corner oil sands project on hold for at least three years as it grapples with rising costs.

The decision means about 70 jobs will be cut, the Norwegian energy firm said Thursday.

That's a pretty grim outlook moving forward, however there are risks to this thesis that must be noted and factored into any trade or investment decision. 

  • As oil price declines oil consuming provinces like Ontario stand to benefit
  • Oil prices in conjunction with a declining ( CAD ) make Canadian exports (including energy) cheaper for international buyers (primarily the U.S.), which is likely to offset some of the declining domestic economic activity
  • If Canadian exports rise enough to offset the domestic energy fallout   ( EWC ) may bottom more quickly than expected and even rise in the face of negative investor sentiment.
  • Canadian manufacturer's which use oil as an input also benefit from the declining oil price and may be in position to increase sales as consumers in other provinces and the U.S. have more discretionary cash to spend, again potentially causing ( EWC ) to bottom more quickly than expected and even rise in the face of negative investor sentiment.

I'm still bearish on ( EWC ) but not as aggressively as I was previously. In fact I think a long ( USD ) short ( CAD ) position may be a better, more direct play to capitalize on the current global macro dynamics. 

What I'm Watching ( Week of 12.29.14 )

This week it's simple. I'm watching/waiting for volume to reenter the market and confirm or reject last week's holiday action. 

Last week ( SPY, DIA, QQQ ) all traded to new 52 week highs with my short target ( EWC ) bouncing significantly in sympathy.

( OIL ) price action appears to have moderated a little in terms of downside volatility; buyers and sellers that remained haven't shown conviction one way or the other yet.

There is good reason to be skeptical of last week's broad market moves. See the disparity between relative volume and average volume across the board. Below I've highlighted the lack of volume of some popular ETF's I'm tracking. 

Except for ( OIL ) which traded at 1.7x average volume the other ETF's experienced anywhere from 0.5x to 0.2x their average volume during the last session. With this week's market open minutes away we will find out if conviction has returned via volume/relative volume throughout the week.  

What I'm Watching ( Week of 12.15.14 )

Canada iShares ( EWC )

Canadian assets are facing major headwinds in the current environment. 

1. The fall in global oil prices hurt producers' bottom line. Alberta is bracing for a decline in GDP into next year as a result. Click for links to articles.

Quarter of new Canadian oil projects vulnerable if oil falls below US$80: IEA 

With oil trading below US$60, provinces brace for impact of global oil price shock

The above chart shows that there are some producers' breakeven Oil price as low as $45. That estimate may well be tested. My concern is that Canada has the lowest return on net cumulative capital cost according to Barclays et al. 

Bottom line, low prices make new projects uneconomic and projects with a higher cost basis return even less than before. This is a net negative. 

2. The $USD continues to strengthen relative to other global currencies. This is especially true for the commodity currencies of Australian and Canadian dollars. 

Therefore $1 USD will in effect be able to buy more Oil when priced in CAD effectively increasing U.S. purchasing power for Canadian production. 

I'm actively looking for a trading opportunity here to the short side. Oil prices are weak, and the producers' currency is declining in relative value. Here are the setups I'm watching in charts.