How Saudi Arabia can hurt North American energy producers

Your top financial and economic news for Oct. 27


Over at Sober Look, Walter Kurtz explains how Saudi Arabia, OPEC’s largest oil producer, is able to pursue a volume-over-prices strategy — something that bodes ill for Canadian energy companies:

According to Deutsche Bank, the Saudi government can sustain itself for almost eight years with Brent crude at $83/bbl. The nation’s government has accumulated sufficient “rainy day funds” to withstand a prolonged period of budget deficits driven by low oil prices.

Armed with such staying power, Saudi Arabia is undercutting the competition in order to expand market share. They know they have the funds to outlast most of the competitors…

While Saudi Arabia cannot entirely stop the growth of North American production, it is going to try slowing it.

On the homefront

The TSX just had its best week since July 2013, with defensive names faring well and energy stocks continuing to make back some of their losses from the past few weeks. However, with the exception of companies in the fertilizer space, stocks linked to the commodity complex sold off on Friday. WTI crude oil declined to end the week, and has resumed its downward trend early this morning. TSX 60 futures are also moving lower ahead of the open.


The Canadian dollar had declined modestly to dip below 89 cents against the greenback.


Temporary foreign workers still on the rise. “The number of low-skill temporary foreign workers entering Canada continued to grow in the first quarter of 2014 despite government efforts to reduce the impact of the controversial program,” writes the Globe and Mail’s Joe Friesen, who suggests that the annual growth in the program as of March may have inspired the government to announce more stringent rules earlier this year. The growth in temporary foreign workers is difficult to square with the rather poor performance of the Canadian labour market over the past year and a half, though of course, vast regional disparities persist.


Valeant prepared to raise bid for Allergan. In a letter sent to Allergan’s board of directors, Valeant Pharmaceuticals’ (VRX) CEO Michael Pearson indicated that the company is willing to raise its bid for the Botox maker to $200 per share (U.S.). “No other potential acquirer of Allergan has the operational and tax synergies that we have, and no other potential acquirer of Allergan can provide the value that we can,” he wrote. Minutes after this letter was made public, Allergan released a solid set of quarterly results.


Fertilizer companies go on a tear. On Friday morning, activist hedge fund ValueAct declared a hefty stake in Agrium (AGU), sending shares up well over seven per cent on the day. Management indicated that it has had multiple constructive discussions with ValueAct, a far cry from its previous battle with Jana Partners, which sought to split up the company. Potash Corp. (POT) rose a more modest but still robust four per cent on Friday, as shares were upgraded by analysts at TD Securities based on the belief that a dividend hike is coming soon.


Two timber companies to report earnings. West Fraser Timber (WFT) and Acadian Timber (ADN) are both slated to release earnings after the markets close. While the financial figures will surely be important to those with a stake in the firm, investors will be looking more broadly at any colour management provides regarding the state of and outlook for the American housing market.


Canada loses out on new auto plant. Ford has decided to make a $2-billion investment on a plant to build new engines in Mexico rather than Windsor, with the federal and Ontario governments reportedly unwilling to provide the level of financial assistance that the auto maker requested. Business investment has been largely missing in action during the Canadian economic recovery — especially outside of the energy sector. Without it, vast swaths of unemployed workers become more and more likely to drop out of the labour force altogether, a social and economic problem of epic proportions.


Oilfield services company boosts dividend. Before the market opened, Precision Drilling (PD) announced its third-quarter earnings. Diluted earnings of $0.18 per share came in a cent above the consensus estimate, while revenue of $585 million was in line with analysts’ expectations. The company trimmed its full-year capital spending plans for 2014 by $26 million to $908 million, and also announced a 17 per cent increase to its quarterly dividend.

Daily dispatches

Dilma Rousseff was re-elected as President of Brazil in a tightly contested race that ended on Sunday evening. Aecio Neves, who was considered to be the more pro-business candidate of the two, garnered a little more than 48 percent of the popular vote compared to about 52 percent for the more left-leaning Rousseff. Funds tracking Brazilian equities, like the iShares MSCI Brazil Capped ETF, have hit the skids in the pre-market trade.


25 out of 130 European banks failed the stress test, in line with earlier reports from Bloomberg. The general reception was that these results were positive; that the European financial system appears to be able to withstand a sizable shock. “We found a shortfall of €25 billion in 25 banks, €136 billion in additional non-performing exposures,” tweeted Michael Steen, head of media relations at the European Central Bank. “They’ve done a lot but need to do more.” Italian banks came out of this health check looking the worst. “The market had been expecting a result of this nature. Over the last six days, the Eurostoxx financial sector has gained 14 per cent, relative to that of the broader index which gained 8.5 per cent,” writes IG chief market strategist Chris Weston. “The review of the banking sector was rigorous, and investors now have a detailed view of the capital held by banks.”


German business confidence continues to wane, with the Ifo business climate index falling to a lower than expected 103.2 in October. That’s the sixth consecutive decline for this index, and its worst reading since 2012.

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